Optimism bias is the tendency to believe that positive events are more likely for you than for others. It’s why people think they'll avoid traffic despite leaving late or assume a new business venture will succeed despite clear risks. For the full list, see my complete guide to cognitive biases in trading. Watch an experienced trader review their journal, and you'll often see a revealing...
The Bandwagon Effect is a powerful psychological bias that affects consumer behavior in ways they often don’t realize. Simply put, it’s the tendency to follow the crowd and believe that it must be right if many others are doing something. This cognitive bias comes naturally to humans due to our inherent need to be part of a group, leading to a herd mentality in financial markets. In the context...
In last week's update I warned of a break below 5500 on the S&P500 and a break below 19150 on the Nasdaq 100 being a critical point for an accelerated drop in the markets. We certainly saw that come true this week! In the S&P500 over the last two days we have seen two pretty large red candles with two pretty decent sized overnight gaps. This seemed pretty extreme to me, so I ran a quick...
The Ease of Movement (EOM) indicator is a volume-based oscillator that helps traders analyze the relationship between price movements and volume levels to determine how easily an asset moves in a given direction. This trading indicator highlights whether a price movement happens with light volume (indicating an easy move) or requires heavy volume to push through resistance. It belongs to the...
The Money Flow Index (MFI) is a momentum oscillator that evaluates buying pressure and selling rules by incorporating both price movements and volume of trades. Unlike the Relative Strength Index (RSI)—which relies solely on closing price—the MFI provides a broader view of market conditions and the direction of money flowing. It belongs to the family of volume indicators, which I compare in my...
The Bullish Percent Index (BPI) is a trading indicator that measures the percentage of stocks exhibiting Point & Figure (P&F) Buy Signals. This valuable tool helps traders assess a market’s internal health, providing insights beyond just market movement and price fluctuations. It's one of several market breadth indicators I cover in my guide to measuring the health of the whole market. A...
The Gann Fan is a trading indicator developed by W.D. Gann, a legendary and 20th-century market theorist who believed that movements in price follow geometric angles. The fan consists of multiple angled lines drawn from a key price high or low, helping traders visualize trend reversals, support and resistance levels, trend direction, and potential price targets. Unlike traditional trend lines,...
Conservatism Bias in Trading is one of the most insidious cognitive biases that stock traders fall into. In simple terms, it’s the tendency to cling to old beliefs and underweight new evidence, even when that new information could dramatically improve investment decisions—a common trap explored in trading psychology. Research has shown that behavioral biases, including conservatism bias,...
Have you ever made an investment decision simply because an expert, a famous investor, or a financial guru said it was a good idea? If so, you’ve fallen victim to authority bias, a common cognitive bias in financial markets. For the full list, see my complete guide to cognitive biases in trading. This bias is natural and widely studied in trading psychology, because from the moment we’re born,...
The High-Low Index is a trading indicator that tracks the number of stocks making new 52-week highs versus those making new 52-week lows. It helps stock traders assess the overall health of a major market index, such as the S&P 500, NASDAQ 100, or Dow Jones Industrial Average. For the other market breadth indicators, see my overview of the family. Imagine a team sport where players are...
The Guppy Multiple Moving Average (GMMA) is a trading indicator that helps traders identify trend direction, confirm momentum, and spot trading opportunities. By analyzing short-term and long-term moving averages, traders can gain insights into market sentiment and potential trend reversals. Much like watching a pack of cyclists in a race, the short-term group represents active short-term...
Fibonacci Time Zones are a technical analysis tool that traders use to project potential price reversals at specific time intervals. Unlike traditional indicators that focus on price movement, Fibonacci Time Zones provide traders with a structured way to anticipate when significant market shifts might occur. A useful analogy is road signs on a highway. Just as signs alert drivers to upcoming...