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Confirmation Bias
By Tom Long | July 23, 2007
The dictionary says that confirmation bias is a tendency to search for or interpret new information in a way that confirms one’s preconceptions and avoid information and interpretations which contradict prior beliefs.
Unfortunately this is something I see almost every day when traders send their charts and ideas to me. What it means is that when looking for information, the person looking will only read and see the information that says what he already believes to be true. This is true in other fields too. Someone who votes for democrats will tend to only read articles that put democrats in good light and ignore the rest. The same goes for republicans too of course.
When it comes to trading this manifests itself when the trader looks at the chart or reads news but will only see what is reinforcing his opinion about the market. For instance someone may believe that the EUR/USD will go up and starts to look at charts and news articles to see if they agree. Unfortunately he will likely only take into account the things that agree with him that the EUR/USD will go up. Any chart indicators or news articles that say the opposite will be either ignored or just glanced over.
It is very difficult to get rid of this bias and many studies show that. This is why you should at least be aware of this phenomenon and really try to be objective when you look at the charts and read the news and make sure you read both agreeing and disagreeing sources. Otherwise the gathering of information is futile and you will go ahead and place the trade you already decided to do beforehand.
Tags: dollar, forex, forex news, forex trading
Topics: Don't Trade Like This |