During analysis and trading it is quite easy to fall in an ‘invisible trap of confirmation’ and it happens to every single trader on earth. That sounds fancy but the principle is simple. Let me explain by asking you these 3 questions:
- Have you ever absolutely loved a trade setup before you entered the market?
- But after exiting the trade, you suddenly started to dislike it more and more?
- Or maybe you even disliked it during the trade or just after the setup?
Did you indeed answer ‘yes’ to the above questions? Has this situation ever occurred to YOU? Let us know down below!
If you did answer ‘yes’, then do not be alarmed because this is normal. In fact, it occurs to almost all traders… And if it has not happened to you yet, then pay attention closely because odds are high that it will – sooner than later.
CONFIRMATION BIAS EXPLAINED
Our brains naturally and automatically seek confirmation of our bias (for longs or shorts on the pair). Any ‘neutrality’ disappears when a trader is convinced that the short or long is a great trade setup and the trader only sees confirmation. Here is an example of how the process works:
‘Trader John sees the GBPUSD. Price is bounding off of a support. He already expected price to respect that level. Oh no, it has moved another 10 pips. And the hourly has bullish candles as well. I must take this long – NOW – before it’s too late.’
In other words: prior to taking the trade, the setup looks invincible and nothing can stand in the way between the trader and the profits. Other traders might be (more) realistic in their outlook of a trade but give the ‘benefit of the doubt’ to their trade setup and still ‘give it a try’. It is very interesting though that once a trade is on the way, traders suddenly see the chart from a different perspective. The trade setup looks worse, more dangerous and in some cases just plain awful. Why? What just happened? Why was a trade that was entered a minute ago suddenly so different?
Let me explain why: the mind. Our minds prefer to seek confirmation of our analysis. Once traders have a trade setup in vision, the mind will focus on finding confirming arguments. The rosy colored glasses are only removed when a trade has been entered or if the trade is not going our way.
So yes be prepared, our minds are going to ‘trick’ us to believe that our analysis is correct and it will look for more and more confirmation until we hit the boiling point and just ‘click’ the button to either buy or sell.
What can we do to make our analysis with less bias and a better reflection of reality?
The first solution to this challenge is by implementing a solid edge via rule based strategy and trading plan. The rules in the plan provide traders with confidence and a road map when to enter and exit appropriately (when the rosy glasses are weakest). The strategy we use in our WET trading room is the StrikerTrader: clear, simple and easy to follow. Sustainable profits are a matter of following the plan and not guessing what price will do at ever single point.
The second solution is to set up confirmation criteria of our analysis and wait for price to meet those criteria before trading. A trader cannot fully remove a bias when the trade setup is coming closer to entry point so that is why setting up confirmation points of the analysis is useful. By doing so, traders establish clear and logical events (candle stick patterns, break through or bounce at trend line) which helps traders from entering and exiting inappropriately due to the confirmation problem.
The third solution is using the TOFTEM model when approaching the Forex market. By deliberately focusing on various steps of the model, the trader is forced to look at the currency pair in a different angle than usual, which stimulates the critical thinking prior to entering and exiting the trade and decreases the ‘conformation’ bias traders tend to have.
What do you think of the solutions? Are there are methods you use to keep your focus?
Thanks for sharing and Happy Trading!
Winner’s Edge Trading, as seen on: