Fighting Your Own Bias

 | Feb 01, 2013 | 8:20 AM EST
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Objectivity requires taking subjectivity into account. -- Lorraine Code

Is it possible for active traders to be totally objective about the market? I write quite a bit about how we should let the price action guide our decisions, but in the back of my head I keep rooting for a pullback -- because I think it would provide better trading opportunities than one-way action with no ebb and flow.

Forming a market view and actually embracing it are two different things. That is even more applicable amid a market that often seems to defy many obvious negatives. We often have to set aside what may seem like very logical arguments because the market just isn't reacting to those things.

The current market action provides a good example of how bias can color your thinking. Everyone would agree that the market has been showing a little softness these last couple days, as we have seen the highest level of selling so far this year. However those with a bullish bent will say it is just healthy consolidation that will set up for further upside. At the same time, those with a bearish inclination will proclaim that it is the start of a topping process that will develop into a downtrend.

My personal bias often tends to be bearish, because I perform better when I'm trading a market that sees sizable ups and downs. I prefer volatility to trends with no pullbacks -- which means I have to fight my inclination to root for what I want and simply accept what is.

At this point there really isn't any technical reason to say that this is more likely to be a top than a consolidation. On an intellectual level, I find it difficult to accept that the market can keep trending upward. I personally see so many economic negatives, and so many people who are still struggling to recover from the Great Recession, and that makes me view the market action as artificial rather than justified.

But I am aware of my market bias, and that is best way to deal with it and be objective about it. I constantly remind myself not to be bearish simply because I would prefer the market to pull back. Instead, I push myself to look for positives, and to find reasons while the pessimistic view is the wrong one.

My bias right now is to look for reasons to support the view that a top is forming. The problem with this is that there really aren't that many negatives. We saw a little selling but, given the run we've seen, that is totally justified and even healthy. There is nothing to suggest that the market is on the verge of collapse. Of course, you can always find some wise bears to provide you with a long list of negatives, but they have been wrong for a long time and there really is no evidence that their worries and concerns are suddenly going to matter now.

My advice lately has been to stick with the trend until there is good reason not to do so -- and, at this point, there is no good reason to believe the trend is coming to an end. Yes, there are a few negatives, which I've pointed out, but they are fairly minor and they don't justify a high level of pessimism.

It's the first day of the new month, which tends to carry a positive bias, and the market is starting out that way this morning. We are going to hear endlessly from the media about how fantastic January was -- but the funny thing is that the news media is far more celebratory than most traders are.

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