Confirmation Bias, or what doesn't kill us will kill us laterS&P 500SP:SPXTotSamiyKaaToday, I want to talk to you about a psychological trap that every market participant faces from time to time—and quite repeatedly: Confirmation Bias. To make it clear, let’s look at an example from everyday life: - Situation 1:\ You want to buy a used car. A mechanic you know tells you: "This car only has a month to live; the engine is toast. Better not take it." You weigh all the risks and consequences, realize that repairs will cost more than the car itself, and you decline the deal. This is because you don’t have Confirmation Bias yet. - Situation 2: You’ve already bought the car. You’re driving it, and suddenly it breaks down. That same mechanic tells you the car only has a month to live, the engine is toast, and you’re better off selling it than fixing it. BUT\, you’ve already spent the money. You hate the idea of "realizing a loss," so you start thinking: "What if I put a bit more money into it? Maybe it’ll get fixed and be like new?" (Spoiler #1: It won't). Or maybe the mechanic is lying and just wants to buy this "rocket" from you for pennies. You start looking for arguments to support your own desires. Congratulations, you have Confirmation Bias. What exactly is Confirmation Bias? In simple terms, Confirmation Bias is a psychological state during a specific period where the brain's cognitive functions are suppressed by subconscious impulses or a desire that is difficult to resist through willpower. Instead of seeking the correct solution—which requires more mental resources due to subconscious resistance—the brain prefers the path of least resistance. It tricks itself into believing that something it made up is the truth. It’s like a primal instinct or an addiction. External factors and your subconscious tell you to stop, not to cross the line, but you can’t help yourself. you do something against logic, following an urge. Even though the most logical and correct thing to do in this situation would be to simply turn around and walk away. What does this have to do with trading, you ask? Trading is an activity where we are essentially trying to "peek behind the curtain" to predict the future. To understand better how can we "predict our handle in future", I want to explain you some brief principles of machine learning, bioinformatics, and neuroscience: Our brain is a powerful analytical mechanism that builds predictions based on its own empirical experience (what we’ve lived through) or the experience of others. If, as a child, we climbed a high fence, fell off, and got hurt, the brain builds a neural connection: high fence — be careful — if you climb, you might fall. From this, the brain draws conclusions, such as: We avoid the fence or don’t climb it because it’s dangerous. We climb the fence, but we hold on tight or bring "fence-climbing gear" to prevent a fall. In other words, the brain draws conclusions based on empirical experience to avoid or repeat a past situation in the future. Interestingly, even if we never fell off a fence ourselves, we can still understand it’s dangerous. But how? This is where the second function of learning comes in: acquiring information through the experiences of others. Everyone understands that sticking your hand into a lion’s cage is an idea for the "Darwin Awards," even if we’ve never done it ourselves. We know someone likely did, and we understand it’s a bad idea. Or maybe no one did, but we understand it indirectly because we’ve seen animals in the savannah and know that lions are very toothy and bitey guys. This is exactly how the currently popular Artificial Intelligence works: it is fed a massive amount of data, trained using specific methods, and—voilà—you have an analytical forecasting program guided by the experience of many, continuing to learn through code based on the principles of the human brain. (Spoiler #2: Quantum computers, through quantum mechanics, can learn to forecast and draw conclusions even faster and more accurately). It’s not "intelligence" in the sentient sense, but it is a very powerful program. I’m getting distracted again. Still, what does this have to do with trading? All these levels, liquidity zones, patterns, moving averages, indicators—this is the information fed to retail traders so they trade using "generally accepted data." It’s a surprising fact, but from time to time, all these tools work, but mostly because of the self-fulfilling prophecy principle. When everyone sees a level at the price of 10.00, everyone places their orders there. And they will work, because liquidity truly matters in financial markets. But I’ve strayed once more. Over time, a person gets the feeling that if they draw a line this way and another line that way, they get a "descending pennant," "three soldiers," or some kind of "Chinese drum" (the name doesn’t matter at all). Eventually, the trader starts seeing all these patterns, lines, indicators, and divergences even where they don’t exist—or where Smart Money (Big Capital / Institutional / Government which manipulates the market) draws them for the trader. Suppose you see a "long" setup in an Inverse Head and Shoulders on SP500 . At this moment, the brain switches on the bias mechanism: You start looking for information that confirms your bias: analysts predicting a move in your direction, a news feed saying we’re going "to the moon," even a 5-minute candle moving where you want it to, while the daily chart looks like a rocket to the stratosphere. All factors are screaming: "This is it, you’re right!" # Well, you’ve fallen into the first circle of the trap # You also encounter news saying the opposite—that the fundamentals are bad, company reports are poor, and tariffs will kill the industry. But you simply dismiss these as "undesirable factors" or "insignificant." Even if the price goes against you, you think it’s temporary. Psychologically, humans seek CONFIRMATION of their guesses, not their denial (L1 and L2 errors). ## You hear the grind of metal and the snapping of the trap's teeth ## You are at a crossroads. Your brain tells you: "Everything is correct, it’ll be a long, you’re right." But your eyes say: "Wait, look at how many negative factors there are." You’re standing there with a 50/50 decision. What’s the right move? And then, a "genius" idea: “I’ve traded this before! Yes, I got stopped out 3 times, but that 4th time I was so right and made a great profit!” Decided. You rely on empirical experience and hit BUY. ### The trap has shut. You lost to your own brain ### Do you think it can get any worse? (Spoiler #3: You bet it can) You might believe that BTCUSD or GOLD will grow without pullbacks—up, up, up—and a correction can’t happen. And if it does, it’s just a "tiny dip" before the move continues. You "BELIEVE" in the long. You open a trade not because you technically calculated probabilities, analyzed fundamentals, studied market sentiment, or looked at institutional positions from reports. No. You just "BELIEVE." You open the trade and wait. The trade hits your stop-loss. You re-enter—and hit the stop again. "Whatever," you think, "I'll trade tomorrow." You close the terminal and go rest. Congratulations, you’ve pulled a lucky ticket and escaped the hook your brain tried to catch you on. BUT... What happens if, by some miracle, you guessed the direction and your bias was confirmed? Your brain’s algorithm will record this function as "working," even though it isn't. The next time a similar situation arises, you will recklessly make a trading decision based on emotions rather than analysis. And you will blow your account. But not all at once. You will do it step by step, painfully and miserably, constantly opening trades in the same direction. Price falls—you buy. Price falls further—you buy more. Price keeps dropping—you average down. Then you hit a stop-loss. And immediately, as if the market was just waiting for your stop, the price starts to rocket up. You go: "See! I told you!" and you buy long again, happy about how smart you are. But you forget that your own brain is tricking you. The "short" situation hasn't stopped being "short," and soon your PnL is red again. You buy more, average down again. Stop-loss, then long again. You simply can't stop. The cycle is complete. If you're lucky, at some point you’ll either be unable to look at the losses psychologically, or you’ll just run out of money. After that, you take a break. A week, a month, six months, a year goes by. You have a new deposit, the trauma has cooled and been forgotten. You’ve learned some kind of lesson. One fine day, you open the news feed or the terminal, and you see "Short" everywhere. You just feel it’s going to fall and fall. How would you act this time? # - - - - - My personal stumbling block is crypto. From 2017 until a certain point, 90% of my trades were "long" and only 10% were "short." I physically and psychologically could not—and sometimes still cannot—force myself to look at analysis without the prism of "eternal growth to the moon." I lost over 20 deposits before I concluded: if I can’t break myself, I won’t trade it at all. Or only on rare occasions when I am guided strictly by logic. This is the only truly effective way I’ve found to fight Confirmation Bias: if you feel something like this happening — just close the terminal. Close the news feed. Don’t trade. Save your nerves and your money. Step back. The market was here yesterday, it is here today, and it will be here tomorrow.