bias” will be our main topic. Last week we’ve talked about whether stock markets had become immune to vaccine news and now it would be better to focus on our own behavior.
The confirmation bias occurs when a trader desperately looks for validation before entering a trade. Markets are always uncertain and we’re unable to predict 100% how it will perform. This desire to be right all the time, however, pushed most of the beginners into a trap, as they end up losing money.
Downsides of waiting for confirmation
When traders wait until there are enough reasons to enter the market, the main downside is that the entry location is improper. As a result, they need to place a larger stop loss and at the same time, the upside potential is reduced. Professional traders are aware that not all trades will end up winners and because of that, they have no reticence in pulling the trigger, when others are doubtful. From a risk management standpoint, the confirmation bias can be among the top reasons why retail traders are unsuccessful.
When CFD traders need more clues?
Trading the markets at all-time highs is a real challenge, as we’ve already discussed and it is during these times that our emotions kick in and hijack our decision-making process. However, there may be times when traders need clues to enter a trade.
Still, it would be important to not sacrifice a better entry location for the sake of accuracy, simply because a better risk/reward ratio can compensate. Also, when trading on major news, traders need to be aware of rumors and facts. Many times the market will act on impulsive and price in an event, only to take a turn when the outcome turns out to be different. “Buy the rumor, sell the fact” is what you’ll hear the media saying.
What are your goals?
Ultimately you’ll need to adjust the decision-making process based on your strategy. If it can be profitable even with a lower risk/reward, then the confirmation bias can’t create large damage. Keep in mind that if emotions kick in, you need to avoid discretionary trading and stay focused on your plan. How many times did it happen to see a clear trading opportunity, yet waited until the market provided confirmation? Did you experience that think so far in your trading journey?