In this educational article, we will discuss one of the most common cognitive errors of newbie traders - a confirmation bias.
In order to better understand that term, I want to start with the example:
Let's say that after doing some research, you are highly convinced that Bitcoin is bullish and that it is a decent investment.
You decide to buy that from 50.000 level, expecting the exponential growth.
Instead of growing, however, the market starts falling rapidly.
Rather than closing your position in loss, you decide to do a new research and execute the analysis, you start looking for the proof of your preexisting beliefs. You completely neglect the voices of Bitcoin skeptics and ignore bearish clues on the price chart.
You consider only the facts that support a bullish outlook, not letting you accept the other point of view.
You become a victim of a confirmation bias.
Unfortunately, such a psychological trap frequently prevents a closing of a trading position in time, leading to substantial losses.
Confirmation bias is a common psychological error that makes a subject overvalue the information that upholds his existing beliefs and undervalue the opposing one.
Here are the most common symptoms of that trap:
1️⃣One is neglecting the objective facts.
2️⃣One is interpreting information in a way to support the existing beliefs.
3️⃣One is considering only the facts that conform with his point of view.
4️⃣One is completely ignoring the information that challenges his beliefs.
The only way to beat a confirmation bias in trading, is to learn to analyze the market from sellers' and from buyers' perspective. Your task is to compare the view of the 2 sides, and pick the one that is stronger, holding in mind the fact that everything can change.
You should always remember of the changing nature of financial markets and be ready to always reassess your views.
