Opinion | Learn Technicals, Then Be Honest

Technical analysis is a wonderful evaluation tool if you can keep your personal biases out of it. I've seen so many people reaching for charts these days, and that's a good thing. Knowledge is a powerful tool if you use it properly and wisely. But having a bias can certainly skew the way you view a chart.

Confirmation bias is defined as the tendency to interpret new evidence as confirmation of one's existing beliefs or theories. The new evidence in this case is the chart, which we could view as supportive or not. But analyzing stocks or indices is how you form a thesis, not the other way around. Our goal is to interpret the charts and technical condition and respond accordingly.  

We have all been there. Stubborn. Believing we are right even if the technical condition is different. I have been seeing it lately, for those who have been dragged kicking and screaming into believing the market can head higher from those dark days last December. I was one of them, until I looked at the charts and said enough is enough, the trend and momentum are up, it's time to go with it or suffer a devastating fate.

If, for example, we have short positions or long puts and are worried about being on the wrong side of the fence, we may view a chart from the biased perspective of what we want to see, rather than what is really happening. A chart is like a painting, a piece of art open to individual interpretation. Two people can view the same chart and come up with diametrically opposing technical opinions. This is fine so long as it was done objectively — someone will be right.

But a pre-existing bias leads our eyes see things very differently. Nobody wants to lose money. And you may still be right in the end — but you're much more likely to be wrong.  The the charts show thar your positions are wrong, and the evidence is compelling, then the right (and honest) thing to do is cut bait. Even if it pains you.

Interpret the chart for what is happening.  Technical analysis has so many patterns out there — from a hanging man, to head/shoulders, to morning star, to three black crows — one could get lost in the shuffle. Traders can make some serious errors in judgment with a bias.  Learn the patterns and what often follows when these are seen and play accordingly.  

Perhaps your analysis of the charts shows a clear directional change.  If that means turning tail and changing direction with your current positions because you were wrong, remember that a small loss is much more palatable than a big one.

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