Psychology
Confirmation Bias
"The cognitive tendency to seek and retain only information that confirms an already formed opinion, ignoring contrary signals."
In-Depth Definition
Confirmation bias is a universal cognitive bias that is particularly dangerous in trading. It manifests when a trader, having taken a position or formed an opinion on an asset, only seeks information that validates their point of view and ignores or minimizes contrary signals. For example, a trader long on a stock will only look at bullish analysis and rationalize every bearish sign. This bias leads to holding losing positions too long ('the market is wrong, not me'), prematurely closing winning positions contrary to their thesis, and overestimating their own analysis. The solution is to systematically seek arguments against your position before entering a trade (devil's advocate), consult contradictory sources, and use mechanical exit rules.
StarQuant Insight
StarQuant's AI provides objective, multi-source analysis, integrating both bullish AND bearish signals simultaneously, thus reducing exposure to confirmation bias in decision-making.
Pro Tip
Before every trade, force yourself to list 3 reasons why your analysis could be wrong. If you can't find any contrary arguments, it's often a sign that confirmation bias is at work.