Traders love to trade. Believe it or not, that can often be a problem. The critical habit of adopting a process and following that process with pure discipline is most in peril when facing a trader’s desire to place a trade. When a trader is looking to get into a position they will find every reason to fast forward to the point of action. Perhaps even more dangerous, they love to find reasons to increase risk and subsequently increase the potential reward. Many times you will hear them use the word “confirmation” when talking about the setup. “Not only do I have 5 out of 6 of my requirements for placing this short crude oil trade, but I also have confirmation from the RSI that the market is overbought and the Libyans are going to cheat on the production cuts! I’m jumping in!” What’s wrong with this statement? This statement doesn’t describe confirmation, but confirmation bias.
What is “Confirmation Bias”?
Confirmation Bias is a psychological phenomenon that explains why people tend to seek out information that confirms their existing opinions and overlook or ignore information that refutes their beliefs. Confirmation bias occurs when people filter out potentially useful facts and opinions that don’t coincide with their preconceived notions.* If someone asks you if you think it will rain in the next hour, do you look for storm clouds in the sky or do you look to see if the people around you are carrying umbrellas? The fictional trader in the example above wanted to go short crude oil. He jumped into the trade before getting real confirmation from his process. In order to do this, he looked for other information that confirmed his existing opinion, rather than receiving confirmation that the conditions were in place (based on his process) for a high probability short trade.
Confirmation bias is common, but problematic. The easiest way to discern between it and actually confirmation is simple. “Did I research this?” If you haven’t research the alleged confirmation and it is not one of your normal steps in your process, it is likely confirmation bias. You already have protection against mistakes while trading Nadex binary options and spreads, but don’t waste this opportunity to become a better trader by relying on Nadex products to protect you from your own mistakes. Limited risk, the option to exit trades early and a wide selection of products to trade can only help you if you use these products to your advantage, not as a safety net from errors. So keep an eye out for confirmation bias and stick to your plan.
We at Path Trading Partners wish you all a happy and safe Holiday Season.