Confirmation Bias - A pernicious threat to your own trading.

Do you recoil in anger at a news story, item, article or blog that differs strongly in opinion to your market view or position?

Do you perhaps find that when a blog has an opposing outlook to you on the market, you stop visiting it?

If the headline to an article is the complete opposite of what you think, do you blatantly disagree with it, even without reading it?

These are all signs of ‘confirmation bias’; a bias which poses a serious risk to your trading success.

When traders have a view, hypothesis or opinion about market direction, there is a danger this can become deeply entrenched. The placing of trades and strategies concurrent with this view deepens this attachment, as do mixing and sharing this view or opinion, with other like-minded individuals. The discussions will veer towards confirming with each other how right you are, and any opposing views opinions will be quickly dismissed. Typically then what happens you pick up on evidence that supports your hypothesis and ruthlessly ignore or dismiss any evidence that opposes it, even without giving it due consideration, often without even reading it or listening to it.

Over the years I have seen the 'confirmation bias' literally destroy traders. I myself have been victim to it, though thankfully without disastrous consequences and before it became too entrenched. I think humans probably have a natural tendency towards it, perhaps linked to a deep-rooted behavioural trait or habit that is natural to us in some form and which served its purpose in ensuring our survival when we roamed the ancient open plains, savannahs and jungles.

My own way of dealing with it, or overcoming it, was to be rigorous and thorough with my analysis and research. I would make sure I tried to visit, read and listen to opposing views. On many occasions, where I had a strong technical analysis opinion, or had seen some research or data which lead me in one direction, I would seek to disprove it, deliberately looking for flaws in my arguments or conclusions (sometimes the market would do the work for you). - As these flaws or holes would disappear or not stand up, my conviction would grow that I was on the right path, though I would always try and keep an open mind. - Even then I was still prone to lapses, but I think you have accept that it important to try and strike a balance between having a degree of self-belief and conviction and questioning that belief, otherwise you risk ending up with no view and never taking a risk.

It would be interesting to hear other people's opinions, thoughts and experiences on this.