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Anchoring Bias

A lot of traders make the classic mistake of focusing on the past and not the future. They start off well enough by making an analysis of the market and a view of where they think their instrument of choice is headed. However the second they take the trade something strange takes hold of them. The emotions of looking at profits and losses hijacks their brains from further rational analyses.

Instead of continuing updating the views of the markets and whether their trade is still viable, they fixate on how much loss or profit their trade is in.

For example, if someone had bought the EURUSD 1.21 and subsequently saw it drop to 1.17, he will refuse to accept his loss and think the market has to go back to his anchored break even price of 1.21. Although nobody else knows this is his anchor price nor do they care.

Traders should not focus on a loss that already happened and wait for the market to make it up to them. Instead of asking when will the market make it up to me and reverse my losses, they should ask where do I expect the market to go on from this point given my updated analysis.

Holding onto losing positions for refusal of accepting loses is one thing, the other is closing winning positions too quickly, although further analysis may indicate it will continue to go up. They do this because they are afraid of losing their gains. Loss aversion.

Again instead of locking profit they should ask themselves Does proper analysis indicate the market will continue to go up.?


Forget you’re open prices and profit and loss on those trade when doing a reassessment of your trades, instead analyze your current exposure and see if it makes sense given the new information and outlook you have for the market.

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