Confirmation bias is looking for proof that you're right and ignoring everything that says you're wrong. In trading it keeps you in bad trades, makes a weak setup look great, and hides your mistakes from you. It's the bias behind the other three.
What does confirmation bias look like?
You're long, so you only read the bullish posts. A red candle is "just a pullback". You remember the one trade off plan that made +3R and forget the five that lost. You keep watching the chart until it shows you the signal you already wanted. Every time it feels like you're doing awesome but it's you agreeing with yourself.
Why does it cost so much?
Because you're judging your trading from memory, and your memory just remembers the wins. Let's say you took 6 trades outside your system last month.
| Trades | Result | |
|---|---|---|
| What you remember | 1 winner | +3R |
| What you forget | 5 losers | -5R |
| What happened | 6 trades | -2R |
In your head that setup made +3R and is a genius move. In your account it lost 2R... and you'll take it again next week because "it works".
How does it connect to the other biases?
It's what keeps them alive. FOMO gets you in late and confirmation bias tells you the move is just starting. Loss aversion makes you hold the loser and confirmation bias finds reasons it will come back. And it makes you remember the extra trades that worked, so overtrading never looks like a problem.
Does it happen in backtests too?
Yes, a lot. You test an idea, it fails, so you change a setting and test again. And again. Until one version looks great. That's not proof, it's you searching until the data agrees with you, which is data snooping. A real backtest is one you accept even if the result is negative.
How do you stop it?
Write down before the trade what would prove you wrong, and close when it happens. Read the other side before you enter, not after. Judge a setup by all its trades, not the ones you remember. Count them, check the win rate and the expectancy in R, and let the numbers decide. That's discipline. Your feelings about a setup are not data.
Frequently asked questions
Related terms
- Tilt — The emotional state where you stop trading your system and start trading your feelings.
- Revenge Trading — Trying to win back a loss right away by forcing trades you never planned.
- Discipline — Following your system the same way every time, especially when you don't feel like it.
- Consistency — Producing steady, repeatable results by trading the same way every time.