Another competition entry from regular contributor Thomas, here he explains the importance of double checking before taking a forex trade & considering why other traders are taking the opposite position to you. You need to be careful that you don't over analyse trades BUT a stop and pause before pushing that button might just save you a loss:

Caution: Confirmation bias!
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When I have learned something about the Forex-Market than it’s three things:
1. The market is unpredictable. It’s all about probabilities which should be in our favour before taking a trade.
2. Main goal should be not to lose money. Therefore, risk management is a key success factor.
3. Less is more: Fewer trades normally mean better trades and eventually more success.

To summarize: caution is key. Nevertheless, many – if not most – traders (including me!) usually don’t pay (enough) attention to a factor psychologists describe as confirmation bias. This is a tendency for people to favour information that confirms their preconceptions or hypotheses, no matter whether the information is true or not.

It means that one tends to notice and to look for what confirms his or her beliefs, and to ignore or undervalue the relevance of what contradicts those beliefs. A confirmation bias contributes to overconfidence in personal beliefs and can maintain or strengthen beliefs in the face of contrary evidence.

The dangerous thing about it is that it can lead to poor decisions, for example in trading! Especially when you are convinced of your trading system and strategy (which, of course, you should be! ;-)).

As mentioned, trading has a lot to do with probabilities. We are all looking to obtain the famous “edge” and eventually pull the trigger. But this lacks an important step: watching out for the opposite opinion before taking the trade.

Of course, you will feel good, if your indicators/system/strategy tell you to BUY and Mark, Dean, Pierre (or whoever) confirms this bias in his analysis. But be careful: Many studies have shown that people tend to pay much more attention to their own bias.

This is easy to explain and understand. It’s easier (and makes one feel more comfortable) to read and listen to people who are of the same opinion. (That’s why each morning we read the newspaper which confirms our political opinion and surround us by friends who share our attitudes. We love it to be confirmed – let’s be honest!)

But in trading we are not surrounded by friends (except at forexmentorpro.com ;-)). Trading is a battle. If you BUY, somebody else has to SELL. He is convinced to be right with his bias as you are. If anybody would trade into the same direction, there would be no trades at all. Every sell position needs a buyer on the other side (who did his own analysis before. What arguments does he have on his side?)

To deal with the opposite opinion is strenuous. It costs time. But I am convinced that eventually it pays out. Be it in setting a more appropriate stop loss mark or even in a cancelled trade.

If, on the other hand, you took the trade as intended after having checked the “other side” thoroughly and nevertheless take a loss eventually, you will feel better than without having checked the “other side” before. At least you can say: I paid attention to the opposite opinion, weighed all the evidence and decided to take the trade, because I was convinced to have the odds in my favour. There is really (nearly) nothing I could have done more to ponder the risks of this trade. And that’s absolutely fine!

So, what can you do to confront yourself to the confirmation bias?

Watch out for analysts and mentors who favour a trade in the opposite direction! What are their reasons? What indicators do they have on their side? Watch out for websites where FX-traders explain their opinion of possible trades at the same pair you are trading. Many brokers offer respective analysis on their member-websites. Many independent and free websites offer estimates at least for the most common pairs, be it in written format or even in short videos.

They list numerous indicators and estimates for numerous pairs on different timeframes like Fib-Levels, Support & Resistance, and Pivot points. I especially like to look at indicators I do not use for my own trading strategy (I found ichimoku clouds very interesting and helpful; I also look at Elliott waves and certain patterns like ABC reversals may also be helpful in this regard).
I don’t want to confuse you, but being aware of confirmation bias should not lead to the other extreme: over-optimization before taking a trade. But this is another story, maybe for the next Christmas competition....
Happy trading!

Thomas