Though many of us may not realise it, our brains are actually wired to favor information that is aligned or favours our beliefs or theories. In forex trading, this is referred to as confirmation bias, a type of selective perception that causes one to actively seek out and assign more weight to evidence that confirms their hypothesis, and ignoring evidence that could disconfirm their hypothesis.
In Forex trading, confirmation bias can be dangerous as it often subtly lead traders in the direction of a desired conclusion, providing them with a false sense of confidence and causing them to make misinformed decisions. This is due to the fact that a trader who falls prey to confirmation bias is deeply entrenched in his opinions and will only actively seek out information that confirms his opinion. As such, the trader tends to make the wrong decision if his ideas or theories are reinforced by the wrong information. This is especially true for traders who rely heavily on indicators, since many indicators will give conflicting signals, and it is not hard for a trader to find those indicators which support a chosen viewpoint. Besides this, confirmation bias can also poses a serious risk to trading successas it causes the trader to ignore his stop loss order and loses twice in a trading activity. By the time price or loss has proven his belief as wrong, confirmation bias may encourage the trader to hold onto his belief and continue to stay in trades well after they should be abandoned, leading to massive losses.
Researchers believe that confirmation bias stems from the great discomfort people feel upon realizing that they are wrong about something. As such, the secret to avoiding making decision based on confirmation bias is to be flexible, willing to admit that you are wrong and have an open mind. During the decisions making process, learn how to accommodate other people's thoughts and ideas regardless of how right you think you are. It is always important to try and strike a balance between having a degree of self-belief and conviction and questioning that belief. Remember, objectivity is necessary to see both sides of the coin, and the best way if you want to test if a method works is to record every signal (whether it is a gain or loss), and not just record those instances where it worked, while ignoring those times when it did not.
Find out more about trading psychology and learn how forex trading success can be more about your mindset and less about the markets.
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