Dealing With Confirmation Bias In TradingConfirmation bias is a self defeating attempt to impose one's own bias on the market. This most often results in pre-trade chart blindness. When we analyze the market with a preset bias, we will only see confluences, patterns, price action, and setups that confirm our bias. This is the human flaw of needing to be correct. The need to be correct will cause traders to subconsciously ignore chart information that would prove us wrong. Confirmation bias results is the inability to objectively analyze the market.
Have you ever noticed that you see a setup and you feel confident before entering the trade that it will work out in your favor based on your analysis. But as you re-assess after entering the trade, you notice multiple confluences that indicate that you may have picked the wrong direction. This is pre-trade chart blindness. You can't see the obstacles to your trade because you have only found the confirmations that support your need to be correct.
It is better to allow the market to determine the bias for us. Price leaves us clues to it's direction and intent. It is our job as traders to objectively weigh the evidence for a buy or a sell. Just as a detective collects evidence that will either prove innocence or guilt in a court of law, we must put our trade setups on trial. We must weigh the evidence impartially and without bias to determine if our setups are innocent (valid) or guilty (invalid), without being attached to proving ourselves right or wrong.
Realizing that you have subconsciously ignored an important piece of evidence after the trade has been executed is too late.
There are 3 ways of dealing with confirmation bias:
1. Remain objective and unbiased in your analysis. Don't tell price what it should do, listen to what price is telling you. Your trade setup is on trial and it will give a confession, but you have to be willing to listen and accept that confession. Warning: Your trade setup may lie under oath (manipulation) so be prepared to always follow the strongest evidence.
2. Take the trade on demo first to quickly move past your pre-trade chart blindness and allow yourself to see clearly what you may have missed due to confirmation bias. If the trade setup is still valid after entering the trade on demo, then take it for real. This will also help with patience and prevent you from getting in too early.
3. Play devil's advocate. For example, if you believe based on the evidence that the trade is a buy, try to find all the reasons that it would be a sell. Weigh the evidence for a buy against the evidence for a sell to identify which has a higher probability. As a bonus you can make the comparison of the risk to reward of the buy and sell setups as another determining factor for which trade to take.
Recognize that confirmation bias exists and anyone can be a victim to it. Being self aware of your potential for confirmation bias and taking steps to mitigate your own bias should be a part of your pre-analysis and pre-trade routine.
