Confirmation bias is the tendency to search for, interpret, and remember information that confirms your existing beliefs while ignoring contradictory evidence. In trading, this means once you form a bullish or bearish view, you unconsciously filter information to support your position — ignoring warning signs and overweighting supportive data.
Selective attention: focusing only on supporting data/indicators. Interpretation bias: ambiguous data interpreted as supporting your view. Memory bias: remembering trades that confirm your system, forgetting those that don't. Echo chambers: following only analysts who agree with your view.
Actively look for reasons your trade is WRONG. Assign a specific 'Devil's Advocate' analysis before every trade — list 3 reasons the opposite direction could play out. Track your hit rate on bullish vs. bearish calls — a skew suggests strong directional bias.
After entering a trade, spend 2 minutes listing evidence against your position. Review losing trades to identify instances where warning signs were present but ignored. Seek out contrary analysis regularly.
Before every trade entry and during position management
The best traders are skilled at holding two contradictory views simultaneously — they know what would make their trade work AND what would make it fail. This dual perspective prevents confirmation bias from creating blind spots.
Anchoring bias occurs when traders fixate on a specific reference point — such as their entry price, an all-time high, or a round number — and make subsequent decisions relative to that anchor rather than evaluating current market conditions objectively. This bias leads to irrational behaviour such as refusing to sell a losing position because the anchor (entry price) feels more 'real' than the current price.
Recency bias is the tendency to overweight recent events and outcomes when making decisions, while underweighting longer-term data. In trading, this manifests as assuming recent market conditions will persist indefinitely — expecting further gains after a rally or further losses after a crash. Recency bias creates a dangerous feedback loop where traders chase recent performance rather than evaluating current probabilities objectively.
Mental accounting is the cognitive bias of treating money differently based on its source, intended use, or the mental 'account' it is assigned to — even though all money is fungible. In trading, this manifests as treating profits differently from initial capital (risking 'house money' more freely), segregating portfolio performance by position rather than total, or taking excessive risk with bonus or windfall funds.
The sunk cost fallacy occurs when traders continue holding a losing position or investing additional capital because of the resources already committed, rather than evaluating the position on its current merits and future prospects. The time, money, and emotional energy already spent become anchors that prevent rational decision-making, leading to escalating commitment to failing trades.