Today I fought confirmation bias. Confirmation bias is processing information in the market so that it fits your preconceived opinions. You overvalue all the information that backs your preconceived thoughts. You ignore all the information that counters your belief. @steenbab (Twitter handle) and @thekirkreport have written about confirmation bias in their blogs previously. I wanted to share how I had to fight confirmation bias today trading AMZN. And what a fight it was.
My partner Steve Spencer wrote a killer blog last night about how AMZN might trade today. 88.80 was the mother of all levels in the After-Hours right after AMZN reported. Those were some nice shorts for us. Chop SMB! So 88.80 was a significant resistance level for the SMB desk on the open. And Steve shared this important level.
So what happened today in AMZN? AMZN traded right to 88.80 today and failed. How do you do it Spencer? We were armed with this significant resistance level. I started a longer term intraday short. I was not covering until there was a Reason the Cover.
In the After-Hours AMZN held 88.80 and then traded down to 85. 85 held the bid after significant volume. So we had our levels. And now I am short AMZN after the fail of 88.80 on the open and I am just convinced that 85 is AMZN’s next stop. Every held bid HAD to get run over. My confirmation bias was in the house.
At 87.40 repeated buying offered support. And my confirmation bias strangled my thoughts:”These guys are idiots for buying here.” But having struggled with confirmation bias in the past, I observed my behavior. I needed to see the screen objectively. So I acknowledged my confirmation bias, quieted my mind, and just read the order flow along with my charts.
And I covered some AMZN. Below 87.40 I would reshort some more. But right now, for my trading system, AMZN was a cover for 2/3 of my position. But only through observing my thoughts and recognizing that I can suffer from confirmation bias was I able to make a quality trading decision.
Now AMZN did trade below 87.40 and I reshorted the 2/3 that I had covered. But I was in complete control of my trade because I recognized my confirmation bias and covered. And then I reshorted when the reshort was proper. If AMZN had reversed at 87.40 I would have profited. When AMZN traded lower I profited. Take that confirmation bias.
And then came 86. Now remember my bias was for AMZN to trade down towards 85. What was this 86 buyer doing? Again I thought, “What an idiot.” But AMZN would not trade below 86. And so I covered 2/3 of my position again. Another good decision.
I was perusing Twitter into the close and noticed @downtowntrader chirp HGSI. My alerts are set for 15 in HGSI. I concluded that HGSI would not be ready for a new leg up until it held above 15. But then I started reading that @downtowntrader was long. And I typed up HGSI and gave it a look. At 14.70 I did not like how the offers were not being cleared. So I did not buy. But this second opinion, my willingness to accept another’s point of view, offered another buying opportunity into the close. And now HGSI is back on my radar. And this is just another example of how I fought and conquered my confirmation bias during today’s trading session.
We all fight confirmation bias. But it will harm our performance if we do not overcome it. Use StockTwits to gain second opinions. If you are fortunate like I am to be surrounded by talented traders, listen to their thoughts. This does not mean mimic other traders. Just consider another opinion. Do you know how many times I have heard Steve chirp a position that was opposite of mine? That did not mean I automatically flipped my position. It just gave me some valuable color on what someone else was seeing with this stock. These other opinions will help you fight confirmation bias.
Talk to you tomorrow. Enjoy your evening! Don’t forget to follow us on Twitter!
9 Comments on “Confirmation Bias”
I enjoyed your post on confirmation bias and a question comes to mind. You stated that you did not take the HGSI trade because it did not fit your criteria because the tape did not confirm. Isn’t that a valid reason not to take the trade? Perhaps another trader has a different style of trading that does not mesh with yours. I guess what I am trying to say is just because HGSI did rally into the close does not necessarily mean the trade was one you would normally take based on what you seek in a valid setup. That is not to say we all cannot learn from others who may trade differently. Perhaps if we can understand the rationale behind the trade and it fits our risk and temperament then we can add it to our own trading arsenal.
I enjoyed your post on confirmation bias and a question comes to mind. You stated that you did not take the HGSI trade because it did not fit your criteria because the tape did not confirm. Isn’t that a valid reason not to take the trade? Perhaps another trader has a different style of trading that does not mesh with yours. I guess what I am trying to say is just because HGSI did rally into the close does not necessarily mean the trade was one you would normally take based on what you seek in a valid setup. That is not to say we all cannot learn from others who may trade differently. Perhaps if we can understand the rationale behind the trade and it fits our risk and temperament then we can add it to our own trading arsenal.
I enjoyed your post on confirmation bias and a question comes to mind. You stated that you did not take the HGSI trade because it did not fit your criteria because the tape did not confirm. Isn’t that a valid reason not to take the trade? Perhaps another trader has a different style of trading that does not mesh with yours. I guess what I am trying to say is just because HGSI did rally into the close does not necessarily mean the trade was one you would normally take based on what you seek in a valid setup. That is not to say we all cannot learn from others who may trade differently. Perhaps if we can understand the rationale behind the trade and it fits our risk and temperament then we can add it to our own trading arsenal.
Thanks for the mention Bella. Great post and comment on walking the fine line between being receptive to input from other traders and yet maintaining your own objective views. Fighting confirmation bias is a delicate affair, since your predisposition to an opinion is derived from your conscious and subconscious experience. You don’t want to ignore your own instincts, and yet you need to remain objective as well. As you mentioned, there is a lot of value in seeing what others are seeing in a stock. We trade on different time frames, with different objectives, and yet I find your commentary extremely valuable in analyzing a position, and in seeing how another trader handles a particular scenario. Whether the calls prove to be successful or not, there is value in understanding what someone else is looking at. Love the blogs and the tweets. Keep em coming.
Kind Regards,
Joey
Thanks for the mention Bella. Great post and comment on walking the fine line between being receptive to input from other traders and yet maintaining your own objective views. Fighting confirmation bias is a delicate affair, since your predisposition to an opinion is derived from your conscious and subconscious experience. You don’t want to ignore your own instincts, and yet you need to remain objective as well. As you mentioned, there is a lot of value in seeing what others are seeing in a stock. We trade on different time frames, with different objectives, and yet I find your commentary extremely valuable in analyzing a position, and in seeing how another trader handles a particular scenario. Whether the calls prove to be successful or not, there is value in understanding what someone else is looking at. Love the blogs and the tweets. Keep em coming.
Kind Regards,
Joey
Thanks for the mention Bella. Great post and comment on walking the fine line between being receptive to input from other traders and yet maintaining your own objective views. Fighting confirmation bias is a delicate affair, since your predisposition to an opinion is derived from your conscious and subconscious experience. You don’t want to ignore your own instincts, and yet you need to remain objective as well. As you mentioned, there is a lot of value in seeing what others are seeing in a stock. We trade on different time frames, with different objectives, and yet I find your commentary extremely valuable in analyzing a position, and in seeing how another trader handles a particular scenario. Whether the calls prove to be successful or not, there is value in understanding what someone else is looking at. Love the blogs and the tweets. Keep em coming.
Kind Regards,
Joey
Great point Harry. My trading style does differ from Bella’s. One of the main reasons I took the trade was based on a concept I call the partial retrace. If you look at the past few days of trading, HGSI was having a hard time closing any bars over 14.40. Initially, these failures would take HGSI back under 14. The past few days, buyers have been progressively stepping up their floor. On Friday, HGSI failed at 14.40 again at the open, but couldn’t push back below around 14.10. It then attempted to get back over 14.40 around 1:30 and failed there again. However, this time buyers were stepping up and not letting it drop under a close of 14.30 on any single 5 minute bar, showing me that buyers were getting more aggressive. This is what I call a partial retrace (a step up in the trading range). When HGSI closed a few candles over 14.40, it was enough confirmation for me to enter. So while there are similarities in how Bella and I are looking at the tape, we do have different ways we look at it, as well as different time frames and objectives.
This is an article I wrote about this concept a couple of years ago.
http://www.investopedia.com/articles/trading/07/partial_retrace.asp
Joey
Great point Harry. My trading style does differ from Bella’s. One of the main reasons I took the trade was based on a concept I call the partial retrace. If you look at the past few days of trading, HGSI was having a hard time closing any bars over 14.40. Initially, these failures would take HGSI back under 14. The past few days, buyers have been progressively stepping up their floor. On Friday, HGSI failed at 14.40 again at the open, but couldn’t push back below around 14.10. It then attempted to get back over 14.40 around 1:30 and failed there again. However, this time buyers were stepping up and not letting it drop under a close of 14.30 on any single 5 minute bar, showing me that buyers were getting more aggressive. This is what I call a partial retrace (a step up in the trading range). When HGSI closed a few candles over 14.40, it was enough confirmation for me to enter. So while there are similarities in how Bella and I are looking at the tape, we do have different ways we look at it, as well as different time frames and objectives.
This is an article I wrote about this concept a couple of years ago.
http://www.investopedia.com/articles/trading/07/partial_retrace.asp
Joey
Great point Harry. My trading style does differ from Bella’s. One of the main reasons I took the trade was based on a concept I call the partial retrace. If you look at the past few days of trading, HGSI was having a hard time closing any bars over 14.40. Initially, these failures would take HGSI back under 14. The past few days, buyers have been progressively stepping up their floor. On Friday, HGSI failed at 14.40 again at the open, but couldn’t push back below around 14.10. It then attempted to get back over 14.40 around 1:30 and failed there again. However, this time buyers were stepping up and not letting it drop under a close of 14.30 on any single 5 minute bar, showing me that buyers were getting more aggressive. This is what I call a partial retrace (a step up in the trading range). When HGSI closed a few candles over 14.40, it was enough confirmation for me to enter. So while there are similarities in how Bella and I are looking at the tape, we do have different ways we look at it, as well as different time frames and objectives.
This is an article I wrote about this concept a couple of years ago.
http://www.investopedia.com/articles/trading/07/partial_retrace.asp
Joey