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Strategies & Market Trends : Strictly Buy and Sell Set Ups -- Ignore unavailable to you. Want to Upgrade?

To: chowder who wrote (6647)	12/20/2005 9:47:30 AM
From: chowder	Read Replies (1) \| Respond to of 13449

Confirmation Bias: Seeing Only What You Want to See ........ At this time of year, we may feel a little more stress than usual, and when we are stressed out, we may tend to see things the way we want to see them, instead of the way they really are. For example, it is almost time for the “Santa Claus Rally,” a phenomenon first described by Yale Hirsch in the “Stock Trader’s Almanac.” On the day after Christmas until the first two days of the New Year, stock prices advance sharply. There are many possible reasons for the rally: Large institutions want to purchase particular stocks at the end of the year in preparation for the New Year; some people prefer to take profits at the end of the year for tax reasons, everyone on Wall Street is in a festive mood, or pessimists are on vacation. Many have speculated as to the possible reasons for the rally, but obviously, there are no guarantees. Since humans have a strong need to win, however, looking for established buying and selling trends at the end of the year is a potential precursor for human error. The confirmation bias occurs when we desperately need to see what we want to see in terms of market prices. In his book, “Trade Your Way to Financial Freedom,” Dr. Van Tharp describes the powerful effects of the confirmation bias: “Most people totally ignore the contradictory evidence, despite the fact that it is overwhelming…people search out what they want, and expect to see, in the market. Most people, as a result, are not neutral with respect to the market, and they cannot go with the flow. Instead, they are constantly searching what they expect to see.” When trading at the end of the year, it’s vital to go with the flow. Don’t force yourself to see something that isn’t there. Remember that nothing is a certainty. History only repeats itself occasionally, but we forget this axiom during times of stress. When we are stressed out, as is common during the holiday season, we are often biased. There is a sense of comfort in believing that the markets are more predictable than they actually are. Will the Santa Claus Rally happen in 2005? Maybe it will. Maybe it won’t. Andrew Leckey of the Associated Press reports that there are good reasons to expect the Santa Claus Rally this year: the economy seems to be coming out of a slump, stock prices have been relatively low all year, and worries about hurricane damage, heating costs, and the burst of the housing bubble seem to have subsided for now. So maybe it will happen this year. If it does happen, it’s wise to capitalize on it. But whatever you do, don’t fall prey to confirmation bias. Innerworth.com (These messages are linked to previous articles.)