How Do Investing and Trading Be Affected by Anchoring Bias?

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Sometimes we act without thinking and make snap judgments. Even while we may have felt that we had a solid foundation for acting, the outcomes were nevertheless unsatisfactory. Anchoring is one of the causes of this. Our ability to make decisions and see our activities can both be messed up by anchoring.

A psychological bias known as “anchoring” occurs when the information that is supplied to a person is accept as the primary point of reference for subsequent decision-making. Even if the knowledge turns out to be unimportant in this specific instance, it still serves as an “anchor” that overshadows any subsequent information and shapes how the individual thinks about an issue.

Concerningly common in trading is anchoring bias. If traders feel that the current prices aren’t fair or adequate relative to the prices they paid for acquiring the asset before, they frequently hang onto positions that are losing them money.

How Does it Happen?

Anchoring is frequently done on purpose to pressure people into choosing the offeror’s preferred course of action. This tactic, for instance, is frequently use at auto dealerships when a customer ultimately agrees to pay less than the seller had first requested.

The purchaser departs feeling satisfied with their purchase. In actuality, the vendor made this decision on purpose. The seller takes advantage of the buyer’s limited capacity to evaluate the offer in the context of the current situation by setting the first price higher than the actual price of the car.

Even if they may later discover they might have found a better offer if they had additional knowledge, the buyer ultimately decides to go with the choice they believe to be more advantageous at the time.

Anchoring, however, can sometimes occur accidentally when people unconsciously regard the first piece of information they come across as the only reliable source on which to make their final choice.

How Does This Affect Trading and Investing?

People might be seriously dupe by anchoring bias when it comes to trading or investing even at the best forex trading platform Malaysia. It could lead a trader or investor to overpay for or undersell an asset, depending on the situation, or to make an unwise investment choice. One of the key causes of traders’ and investors’ poor financial judgment is anchoring.

For instance, if you purchased $100 worth of stocks without first investigating the market fundamentals, such as the company’s potential for development, profitability, etc., you might not be able to sell them for much more or even break even.

If the stock price continues to decline below $100, you could find it difficult to sell it and decide to keep hanging onto it in the hopes that the price will rise again. Yet the $100 asking price might as well have been a typo. Without realizing it, you overpric your purchase by letting yourself get seduced by the initial price you saw. Many people who work in the financial industry experience this, but it doesn’t imply they are aware best forex trading platform Malaysia of the anchors that stand in the way of their ability to execute profitable deals.

The most popular anchors include past prices, financial indexes, sales volume, and high-water marks. They might ultimately leave you disappointed if you use them as your main source of information while making financial decisions.

How to Avoid it?

Since it forces individuals to rely their decisions on the first piece of information they manage to catch sight of on the market, anchoring may be risky for both traders and investors.

You should think about implementing the following measures to minimize anchoring bias when trading or investing:

Follow Current Affairs on Trading:

It might be beneficial to keep up with market news to prevent you from relying on stale knowledge as an anchor. You can learn about the most recent trade news faster with FBS Trade than best forex trading platform Malaysia you can anywhere else, and you can better navigate through the ongoing developments in the financial markets.

Concentrate on Long-Term Results:

When your only concern is immediate profit, it’s simple to become anchored to the present price. But, when you’re concentrating on long-term outcomes, you’re more likely to take into account any future market price swings.

Create a Plan of Action:

A well-crafted trading strategy with the best meta trader brokers may provide you with a set of rules and recommendations that can aid in preventing anchoring. You’re less likely to be sway by your emotions and more likely to remain impartial while making judgments if you have a well-established method.

Verify Many Sources:

As you start fresh trades, being expos to a range of viewpoints from many sources might help you avoid anchoring and maintain your objectivity.

Remain Focused:

You may avoid anchoring or falling prey to other cognitive biases by maintaining focus and being aware of your thoughts. To clear your mind of emotions and reduce tension, you might want to try meditation.

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