Confirmation bias

Confirmation bias describes the psychological tendency to seek, interpret, and recall information in a way that confirms one's pre-existing hypotheses or beliefs. Individuals selectively focus on data that supports their views while ignoring or downplaying evidence that contradicts them. This cognitive shortcut helps maintain consistency in one's perceptions, but can lead to flawed decision-making.

For a retail trader, confirmation bias can lead to poor trade selection and risk management. A trader might only seek news or technical indicators that support a planned trade, overlooking critical signs of weakness. This can result in holding losing positions for too long or entering trades without sufficient due diligence, increasing drawdown and potential capital loss.