Common Cognitive Biases in Trading Decisions

Cognitive biases are recurring tendencies in how people interpret information and make judgments. In a trading review, use a bias as a question to investigate. Start with the information available before an action and compare it with the explanation recorded afterwards.

Confirmation bias

Confirmation bias can involve favoring information that supports an existing view. A practical review asks which sources were considered and what evidence would have challenged the view.

Before a simulated decision, write one reason the planned interpretation could be wrong. Keep the note with the original plan so that the later outcome does not replace the earlier uncertainty.

The trading psychology fundamentals provide a framework for this record.

Anchoring and recency

An anchor is a reference point that can shape a judgment. In a review, ask why a particular price, estimate, or prior outcome became the reference point. Record whether the reference was specified before the decision.

Recency bias concerns giving particular weight to recent information. To examine it, compare the evidence used in a session with the criteria defined in the plan. Recent events may be relevant, so describe why they mattered instead of assuming they were distracting.

Hindsight and overconfidence

After an outcome, an earlier event can feel easier to predict. Preserve the original note, including alternatives and uncertainty, before adding a retrospective explanation.

Confidence can also exceed what a record supports. When reviewing a prediction, ask what the statement meant, when it was made, and what observation would count against it. Avoid rewriting the statement after learning the result.

What does the disposition-effect research show?

Terrance Odean examined records from 10,000 historical brokerage accounts and found a preference for realizing gains rather than losses in that sample. The research gives a concrete empirical example for investigating selling behavior. Its setting and historical data matter when interpreting the result. Original study

The finding does not establish an explanation for every individual sale. A review still needs the plan, the information available, and relevant constraints.

A hypothetical bias review

A fictional trader writes, before a simulated session, “I think the move will continue, but I would reconsider if the stated condition fails.” Afterwards, the trader remembers having been certain about the move.

The review compares that memory with the original wording. It can show that the later account lost the original uncertainty. This invented scenario illustrates a documentation problem and supplies no personal diagnosis.

Use the journal template to preserve the original account and the later reflection.

Turn the concept into a review question

Choose one concept and define the observation you will record. For confirmation bias, you might document the source supporting the view and one source or observation that challenges it. Count the available records and keep incomplete entries visible.

A constructive after-session review can help express the finding in concrete language.

In Mental Coach, bring the relevant record to the conversation and check every suggested interpretation against it. Treat the exercise as education and reflection. Consult qualified professionals for personal investment advice and mental health concerns.