Yesterday’s article discussed how Forex traders must attempt to remove their bias from trading otherwise our brains will seek confirmation for any and all trade setups. This is not an easy feat to achieve but traders can improve this with sufficient focus on a clear trading plan and rules, on the TOFTEM model, and on using confirmation signals.
In most of these articles you will often see a reference in the text where I specify waiting for a confirmation signal or waiting for price to reach a ‘decision moment’. I do this to remove the above mentioned bias and keep my trading and analysis ‘neutral’. Simply put, from a trading perspective, I don’t want to have a preference for longs or shorts because otherwise my analysis becomes biased.
ANALYSIS & CONFIRMATIONS
Let us take a look at 3 of last week’s posts to review how the analysis was done and how the currency pairs looks like now one week later.
Article 1: GBPAUD October 14.
Before: The article mentions factors in favor of up and down side and then identifies the decision moments, which were the two trend lines (on top and bottom). It also continues to explain which support and resistance levels are important after the break.
After: The analysis took away the bias that I had which was bearish at the time. The problem is that price could have easily bounced off of the bottom and any short might turn into a loss. By waiting for the break of the trend lines I removed my bearish bias for the entry. The same bias was removed for the exit by establishing where support levels could be. That way I identified that price could bounce at the 38.2 Fibonacci retracement level, which saved me from aiming my take profit too low. A trader can easily overestimate profit potential if the confirmation bias is strong.
Article 2: drawing trend lines on 2 pairs October 16.
Before: Last weeks’ article mentioned the GBPCAD and EURNZD. The GBPCAD analysis reviewed the contracting triangle and the strong up and down momentum prior to it. The EURNZD seemed to be pushing for a bearish breakout and the confirmation of the short was the break of the support trend line.
After: the GBPCAD did indeed break the resistance trend line but price did not manage to get to the expected target. The horizontal resistance (purple) stopped price from reaching higher levels. The EURNZD did indeed bounce strongly (green circle) before price finally did break the horizontal support (blue) and fell to the expected support trend line (light blue).
Article 3: warning on EJ and UC October 15.
Before: Last weeks’ article mentioned the EURJPY and USDCAD breakouts. The breakout of EURJPY and USDCAD seemed questionable and I wanted to have a confirmation of the breakout by waiting for a strong bearish weekly candle for the EURJPY and strong bullish weekly candle for the USDCAD.
After: The EURJPY turned out to be a false break out and the candle close was far off from a strongly bearish. In fact, the weekly candle closed bullish and a massive pinbar occurred. By waiting for the confirmation I saved myself the headache of getting caught in a false breakout.
The USDCAD was not a dramatic reversal as the EURJPY but it did have a wick on top which represents half of the candle. Conclusion: this is certainly not a strong breakout but also not a massive reversal sign either (unless price was to break perhaps last week’s low).
How do you perceive the confirmation bias? Is it something that you have noticed in your trading and how do you deal with it? Please share your experiences with other traders.
Thanks for sharing and Happy Trading.
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