That word that has come to be so divisive and annoying. Shoved down our throats over the last 2 years, it’s become somewhat of a battleground between Remain and Leave voters.
Who remembers what the price of GBPUSD was before the referendum? It was about 1.40/45 for a while. Some time after, it had ticked down to $1.20.
Media was in mayhem.
We had been so used to prices of $1.40 and above that a large down move was unthinkable. Many were reminiscing about GBPUSD being valued at about $2, and this is why it seemed so shocking.
This is known as anchoring, and this occurs when people place a value on an initial piece of information that dominates the rest of their thinking.
Take this example: as a sales person, you offer three different prices (or you should at least).
You offer one price which you believe your prospect would not value as much. Another which they would find too expensive. Then one in the middle which they would find just right.
You’re aiming to make the optimum amount of sales around that middle value. They are anchored by the first bit of information where price is too cheap. They are limited by the upper price of being too expensive. The middle ground is made by the product that is at the median of their budget.
The exact same bias is faced in trading.
Many who trade intraday may be afraid to think that the Euro has the potential to reach 1.60 (which I think it certainly does) because they have been used to price being at around 1.04 – 1.25 for such a long time.
Or, others may believe that a trend cannot continue moving, such as we have seen in the crypto markets. Myself in fact, being one of these people where I was trying to call a bounce on XRP… it just kept going to the downside – lesson learnt.
The best FX traders don’t care about past price as a nominal figure. They care about price structure and what price is doing and where it could go based on external variables.
They do not get sucked into a game of ‘it’s too low’ or ‘it’s too high’, or ‘this indicator is telling me that price is oversold’.
It is simply ‘the market is doing this, so I should execute or not based on this, this and that.’
Be a market atheist
This brings me onto a larger topic to do with heuristics and biases. One of which is anchoring, as mentioned above.
Our brains want to short cut to make things easier on ourselves & our thought processes. In order to remain impartial, we have to try to overcome these.
Here is a fantastic table to show you which processes you must undergo to try to overcome your biases. At the end of the day though, we are all humans and we will naturally face biases.
Except in trading, these biases can kill your account.
This was a guest post from David at DavidBelleFX.com. I’d like to thank David for writing for my site and would encourage any traders to head over to his site. DavidBelleFX.com is a fantastic resource for traders.