Every trader even professional traders depends on the reference points while making the any trading decision. Sometimes these first piece of information can be useful. But most of time psychological anchoring bias continue to influence the price after they love their relevance.
Meanwhile anchoring bias leads trader to depend on the initial information or thesis while avoiding the current market conditions. As a result it causes traders to stay in the losing trades, miss money making opportunity and make decisions based on the outdated information.
Developing the deep awareness about the anchoring bias may not impact the trading performance but it helps traders to become more objective and flexible.
What Is Anchoring Bias?
Anchoring bias the bias where traders rely heavily on the first piece of information they perceive while making the decisions. Rather than analysing the current market scenario’s they continue with previous bias which established while making the decision for the day. In anchoring bias the stay the previous price decided to buy or sell the asset. Previous high target and so on… They fail to adjust according to the new market data which causes them the losses.
Holding on to Losing Positions: A trader may not sell the asset below the purchased price. Because they will hope that the market will return to it’s original purchase price or breakeven. Instead of looking at the current market scenario.
Selling Too Early: A trader may hold the trade until it is until it is in the loss. But when they see the little bit of profit they sell it out of the eager. Meanwhile ignoring the current scenario of bullish trend just started.
How Anchoring Bias Appears in Trading
Anchoring bias occurs when traders fixate the price of the asset such as original entry price or 52 week high. Traders make their decision while keeping the original entry price or 52 week high in the mind. Traders rely on these aspects rather than responding the current market fundamentals.
Reluctance to Buy at “Higher” Prices
Traders often prevents themselves from buying the trade at the higher prices because they missed the opportunities at the lower price. Now when the price moves in the upward direction traders often hesitate to buy because they consider it as the expensive price.
Misinterpreting “Highs” and “Lows” as Fair Value
A common mistake traders make is assuming that a stock trading far below its 52-week high is automatically a good investment. The previous high becomes a psychological anchor, while the current price may actually represent the company’s true value based on current market conditions and business fundamentals.
Fixation on Arbitrary Round Numbers
While executing or placing the trades traders set the buying limit or sell limit at the psychological levels like 50$, 100$, 150$ etc. This causes them to miss the entries or early exits whenever the price slightly moves after touching the psychological levels.
Common Anchors Traders Rely On
There are some anchors pillars which traders rely on.
Historical & Price-Based Anchors
Purchase Price (Entry Point): The point where the trader has engaged with the trade. They don’t accept the loss in hope of price will again come to the breakeven or i’ll book the at the small gains.
Round Numbers: Levels at 50$, 100$, 150$ serves as important psychological levels. The price reacts very aggressively whenever the price approaches this zones.
Analyst Price Targets & News: Media and social influencers often increases the values of one asset than the it’s original worth.
Support & Resistance Levels: Historic swing high and lows acts as the strong support and resistance zones. These are the most prevalent levels for setting target price or stop loss.
Anchor Charts: Most of the traders analyze the higher time frame charts to see the broader trend. And when they fixes their bias they start executing the trade on lower time frame.
How to Overcome Anchoring Bias
In order to overcome from the anchoring bias, it requires a shift from detach from the historic entry prices. Make the decisions’ according the current market fundamentals instead of previous high and lows. Always use the rules based criteria to exit the trade, whether it is target price or stop loss.
Evaluate Independently: Before looking at the current market price, analysis the markets using charts of the different platforms. This will help you find which level and price is relevant and similar across all the trading charts.
Set Rule-Based Exits: Set stop loss limit and profit target price in the trade. However this may help you to reduce attachment to the trade.
Maintain A Trade Journal: Write down the every trade whether it is intentionally or forcefully. This isn’t only improves trading but it structures the trading in the most efficient way.
Utilize Price Action Zones: Instead of fixing the specific price point, analyze with the current market scenario and aspects. Respond to the current market sentiments when to exit the position and when to hold the position,
Some Add On Words
One of the major and most common psychological traps in trading is anchoring bias. By ignoring current market trends and finding yourself emotionally attached to the trade.
Successful trading requires flexibility and versatility.
The pro traders adjust themselves and their decisions as the markets evolves differently in the different sessions.
In trading staying objective is more important than the attaching to the one particular entry point or trade.