How to avoid confirmation bias in trading

Confirmation bias is a common trap that many traders fall into. It involves selectively searching for information that confirms our thesis while ignoring information that contradicts it. For example, if you believe that the price of XYZ stock will rise, you focus only on articles and analyses that confirm this, ignoring negative forecasts. Example: You have capital of 10,000 PLN and invest 3,000 PLN in stocks based on positive articles. However, you ignore the company's poor financial results. The stock drops by 20%, and you lose 600 PLN. If you had considered all the information instead, you could have avoided this loss.

The mechanism is simple. By seeking confirmation, you limit your field of vision and stop objectively assessing the situation. In trading, where every decision can have immediate financial consequences, this means making mistakes that could have been anticipated. It's easy to fall into the confirmation trap because we naturally want to be right. However, this leads to making decisions based on incomplete data, which increases the risk of losses.

Assume you have a capital of 15,000 PLN and, under the influence of confirmation bias, you invest 5,000 PLN in risky stocks, hoping for a quick profit. However, you ignore warning signals. The stocks lose value by 15%, resulting in a loss of 750 PLN. If you had avoided confirmation bias and fully researched the situation, you could have made a more informed decision, minimizing risk. Even 10% of such errors with a larger capital can lead to losses of several thousand PLN annually.

To avoid confirmation bias, follow a few simple rules:

• Diversity of sources: Always seek information from various sources, both positive and negative.
• Challenge your assumptions: Regularly question your assumptions and check if you are relying solely on confirming information.
• Automated alerts: Set up alerts on trading platforms to stay updated on any significant changes, regardless of whether they align with your thesis.
• Trading journal: Keep a journal where you record your decisions, their rationale, and outcomes. Analyze them regularly to learn from your own mistakes.

Daily Check

• Check one source every day that challenges your thesis.