Article's

"It isn’t what you don’t know that gets you into trouble. It’swhat you know for sure that just isn’t so”  -  Mark Twain

One of the many pitfalls in trading / investing is Confirmation Bias.

Confirmation bias is the tendency of people to pay attention to informationthat supports one's conclusions and consciously or unconsciously ignoreinformation that is contrary to the conclusions.

Those who allow themselves to fall victim to confirmation bias when makinginvestment or trading decisions in financial markets eventually pay dearly fortheir sins. They end up staying in trades / investments well after they shouldhave been abandoned.

For example – A Trader enters a position and then focuses mainly on theIndicators, Chart Patterns, Data Points, Statistics, News or Market Behaviorthat supports staying in the position. Any contrary information is consciouslyor unconsciously ignored. When the trade goes wrong the bias makes it difficultto accept mistake and square off the position. The stop loss is not adhered to.The loss is usually booked when it’s too painful to sustain the confirmationbias resulting in a large damaging loss.

What can be done to avoid this?

• Always accept unconditionally that "Markets are always right, Quote / Price on the screen is all that matters".
• Technicals, Fundamentals, News, Statistics; no matter what you follow, always understand that none of them is infallible or absolute.
• Avoid the need to always win or be always right in the markets.
• Know your risk and reward before taking the trades and be prepared mentally for taking a manageable loss.
• Paying attention to dis-confirming evidence is naturally difficult. Intentionally look out for contrary information in fresh market data.
• Often it may be difficult to get an instant answer to "why" a trade is going wrong. Just stick to stop loss decided as per risk reward.

Often the losing trades in hindsight give us valuable experience / insightsfor things to do and things to avoid in future. Manage your losses and profitwould take care of itself !

“It is the mark of an educated mind to be able to entertain a thoughtwithout accepting it” ~ Aristotle