Lessons › Trading psychology and process › Mind tricks: confirmation, recency and anchoring
World 9 · Trading psychology and process · lesson 7 · level 3
Mind tricks: confirmation, recency and anchoring
Your brain takes shortcuts, like only noticing what agrees with you, so build rules that catch those shortcuts.
In one line
A stock fell from 160 to 100. Why does 160 still feel like its 'real' price?
Explained simply
Your brain uses shortcuts to save time, like guessing a book is good because of its cover. In trading, these shortcuts can trick you: you notice only the news you like, overreact to your last few trades, or get stuck on an old price. Rules written ahead of time work like a spell-checker for your thinking.
The lesson
Confirmation bias makes you seek or read evidence in ways that favour what you already believe. Recency bias gives the last few trades or candles too much weight, and anchoring makes you cling to a number you saw earlier, such as your entry price or an old high. A classic study of judgement found that estimating by adjusting from an anchor is a shortcut that usually works but leads to systematic, predictable errors. Checklists, invalidation levels written in advance and large samples help counter these shortcuts.
A worked example
Illustrative example: a stock's 52-week high was 160 and it now trades at 100. An anchored trader thinks it is cheap because it has fallen (160 - 100) x 100 / 160 = 37.5% from the high. But getting back to 160 would need a rise of (160 - 100) x 100 / 100 = 60%, and nothing on the chart says that will happen. Recency check: your last 3 trades on your favourite setup lost, but your log of 40 trades shows 16 wins at 2R and 24 losses at 1R, a total of 16 x 2 - 24 x 1 = 8R.
The same idea at four levels
- Beginner. A bias is a thinking shortcut that can trick you.
- Foundation. Confirmation bias is seeing only what agrees with you, recency bias is overweighting your latest trades, and anchoring is sticking to an old price.
- Intermediate. Before entering, write one fact that argues against your trade and the price that proves you wrong.
- Advanced. Judge setups by a large sample, such as 30 or more past cases, not your last three trades, and treat an old high as just a number, not a price the market owes you.
- Expert. Knowing about biases does not switch them off, so build defences into your process: checklists, pre-written invalidation levels and journal reviews that look for bias patterns.
Mistakes to avoid
- Believing you are immune to bias because you know about it.
- Judging a setup by your last few trades instead of a large sample.
- Holding a falling stock because it 'should' return to an old high.
Check yourself
What is a bias?
A thinking shortcut that can trick you. Shortcuts save time but can lead you astray.
Seeing only the news that agrees with your trade is called what?
Confirmation bias. You confirm what you already believe.
Clinging to an old high as the 'real' price is called what?
Anchoring. The old number becomes an anchor.
Giving your last three trades too much weight is called what?
Recency bias. The most recent events feel the most important.
A stock fell from 160 to 100. What rise would take it back to 160?
60%. It needs to gain 60 on a base of 100.
Goal of this lesson: Recognize common thinking biases that distort trading decisions.