Anchoring & Adjustment Bias: How to Escape This Trading Trap

Anchoring & Adjustment Bias: How to Escape This Trading Trap - Table of Contents

What is Anchoring and Adjustment in Trading?

Have you ever bought a stock and fixated on the initial stock price you paid, refusing to sell until it returns to that level, even when the market condition is telling you to get out? That’s what we call Anchoring and Adjustment Bias, and it’s one of the sneakiest trading psychology traps in trading that relates to everyday decisions.

This mental quirk causes stock traders to rely too heavily on an initial piece of information (the “anchor”) and adjust insufficiently from that reference point. It’s the same reason why people struggle to sell an asset for less than what they paid, even if market conditions have changed.

For traders, anchoring distorts current market conditions and rational decision-making, leading to holding and losing trades too long, ignoring equity market signals, and making adjustments based on an outdated reference point rather than objective data.

Let’s dive deeper into how this bias messes with our trading decisions – and, more importantly, what we can do about it.

How Anchoring and Adjustment in Trading Impacts Trading Decisions

Anchoring bias in decision-making shows up in stock trading in several ways:

Holding onto Losing Trades: Traders often anchor to the original price they paid for a stock, refusing to sell at a loss because they “know” it will recover. This leads to larger-than-necessary drawdowns and emotional distress.
Overvaluing Past Performance: If a stock performed well in the past, traders may believe it “should” continue performing well—even when fundamental or technical indicators suggest otherwise.
Underreacting to New Information: Stock traders anchored to an initial forecast may ignore earnings forecast reports, economic shifts, consumer behavior, or market trends that contradict their initial belief.
Failing to Take Profits at Logical Levels: Traders often set arbitrary profit targets based on past highs rather than an objective strategy. Instead of locking in gains, they hold out for an unrealistic share price, allowing winners to turn into losers.

A recent study provided empirical evidence that investors anchor their initial price estimations to past reference points, such as the 52-week high or low, leading to a dynamic shift in the behavior of investors. Underreaction after large price shocks. This supports the idea that traders often fail to adjust their expectations based on new information, as described in the anchoring bias examples above.

The Role of Trading Systems in Mitigating Anchoring Bias

The best defense against anchoring is a systematic trading approach.

Trading systems remove emotional bias in human behavior by providing predefined entry and exit rules. Instead of making informed decisions based on past prices or arbitrary beliefs, systematic traders act on tested strategies.

Position sizing and stop-loss strategies help systematic traders exit losing trades without hesitation, preventing them from anchoring to past cognitive biases.

Moreover, backtesting ensures that every financial market decision is rooted in historical performance, not gut feelings. Traders who rely on systems gain confidence because they trust the data, not their emotions.

Challenges Systematic Traders Face with Anchoring Bias

Even systematic traders are not immune to anchoring bias. Here’s how it can still creep in:

Ignoring Updated Backtest Results: Some traders become too attached to their system’s past performance, resisting updates even when financial market conditions change. Regularly reviewing backtesting results is essential.
Adjusting Strategies Based on “Feelings”: Traders sometimes override their system because they “feel” the stock market will behave differently. This is just another form of anchoring bias. Always remember to stick to the rules!
Hesitating to Trade After a Losing Streak: If a trader anchors to recent losses, they may hesitate to take the next trade—even if their system tells them to. Long-term performance matters more than short-term streaks.

Actionable Tips for Overcoming Anchoring and Adjustment in Trading

Here are practical strategies to help traders stay objective:

Journaling Every Trade – Write down why you entered and exited trades to spot anchoring patterns.
Strict Stop-Loss and Exit Rules – Predefine exit strategies so you never hesitate when a trade turns against you.
Regular Backtesting and Reviews – Trust updated data, not old beliefs.
Accountability Partner or Coach – Have someone keep you honest when emotions creep in.
Detach from Purchase Price – Treat every trade as a fresh decision based on current stock market dynamics.

Frequently Asked Questions about Anchoring and Adjustment Bias in Trading

What is an example of Anchoring Bias in Trading?

A trader buys a stock at $50 and refuses to sell below that price, even when the stock drops to $40 and signals suggest further downside. This indicates insufficient adjustment of stock prices.
They are anchored to their purchase price instead of making a rational decision based on financial market data.

Can systematic trading completely eliminate anchoring bias?

No, but it dramatically reduces its influence by replacing emotions with data-driven decisions. The key is strictly following a well-tested system.

Why do traders struggle with adjusting their expectations?

People are wired to seek consistency in decision-making. Adjusting beliefs based on new information requires conscious effort, which systematic trading helps enforce.

What are the dangers of anchoring bias in stock trading?

Anchoring can lead to large losses, missed opportunities, and overconfidence in outdated views. Traders stuck in this bias often find themselves holding onto losing positions for far too long.

How can I train myself to overcome Anchoring Bias?

Practice journaling, backtesting, and following predefined rules. The more you trust your system, the less anchoring bias will affect your decisions.

Conclusion: Master Your Mind, Master Your Trading

Anchoring and adjustment bias is one of the biggest psychological traps in stock trading. If left unchecked, it can lead to costly mistakes, poor risk management, and missed profit opportunities.

The solution? A systematic trading approach that removes emotion from the equation.

With the right trading systems, you can confidently follow objective rules and make data-driven decisions—rather than anchoring to old, unreliable reference points.

Want to eliminate psychological biases from your trading? Learn how to build 100% confidence in a portfolio of proven trading systems with The Trader Success System – Apply to join today

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Trading Psychology and Psychological Bias Articles

To dive deeper into how other psychological biases affect your trading psychology and decisions as well as practical ways to overcome them, explore the articles below. For a comprehensive guide on mastering your mindset and building a resilient psychology, visit our Trading Psychology page.

Adrian Reid Founder and CEO

Adrian is a full-time private trader based in Australia and also the Founder and Trading Coach at Enlightened Stock Trading, which focuses on educating and supporting traders on their journey to profitable systems trading. Following his successful adoption of systematic trading which generated him hundreds of thousands of dollars a year using just 30 minutes a day to manage his system trading workflow, Adrian made the easy decision to leave his professional work in the corporate world in 2012. Adrian trades long/short across US, Australian and international stock markets and the cryptocurrency markets. His trading systems are now fully automated and have consistently outperformed international share markets with dramatically reduced risk over the past 20+ years. Adrian focuses on building portfolios of profitable, stable and robust long term trading systems to beat market returns with high risk adjusted returns. Adrian teaches traders from all over the world how to get profitable, confident and consistent by trading systematically and backtesting their own trading systems. He helps profitable traders grow and smooth returns by implementing a portfolio of trading systems to make money from different markets and market conditions.

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