In trading, information is abundant — and so are our mental shortcuts. One of the most dangerous of these is confirmation bias: the tendency to seek, interpret, and remember information that supports our existing beliefs while ignoring evidence that contradicts them.
For traders, this bias can quietly erode decision-making, leading to overconfidence, missed warning signs, and ultimately poor performance.
How confirmation bias shows up in trading
You might be falling into confirmation bias if you:
- Only read news or analysis that agrees with your trade idea. For example, you go long on a healthcare stock and spend the next week ignoring reports about industry slowdowns.
- Overweight supportive signals. You spot one bullish chart pattern and discount several bearish indicators because they “don’t matter as much.”
- Filter your watchlist. You keep scanning for setups that fit your preferred narrative instead of evaluating all opportunities objectively.
These habits might feel harmless in the moment, but they can cause traders to cling to losing trades for too long or enter positions with flawed reasoning.
The risks it creates
- Distorted risk assessment: By ignoring negative evidence, you underestimate the potential losses.
- Missed market turns: If you’re fixated on bullish news, you might be late to exit when a reversal starts.
- Emotional trading: Confirmation bias often partners with hope — and hope is not a strategy.
How to avoid confirmation bias
- Consider the inconvenient truths
For every trade idea, force yourself to find and consider the evidence against it. This balances enthusiasm with caution. And there’s no downside to understanding all angles. - Use predefined trading rules
Having strict entry, exit, and risk management rules means your trades are less likely to hinge on your current mood or narrative. - Journal your trades
Document your reasoning, signals used, and ignored factors. Reviewing this later often reveals bias you missed at the time. - Backtest and paper trade objectively
When testing strategies and entry points, don’t cherry-pick data ranges that “look good.” Use varied market conditions to see if your method holds up.
Markets don’t reward traders for being “right” — they reward them for being profitable. The most successful traders aren’t those who predict every move, but those who respond effectively to whatever the market does. Avoiding confirmation bias isn’t about being pessimistic — it’s about staying open-minded, disciplined, and adaptable.
Trading biases can be difficult to combat, we believe the best thing you can do is simply have someone to talk to. Being inside your own head when making trading decisions can make you do silly things, so having a trusted person keep you honest is vital.
Our advisors have seen it all and constantly encourage clients to call in and chat through their trades as often as they like, and the best traders do just that.
Need help? Call our team on (03) 8080 5788 for a chat.