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Trading Lessons: The Danger of Outcome Bias


By any name, this tendency can play havoc with your trading.

Dear Professor Sadana,

When you wrote about "ownership bias," it was as if you wrote about me. I realized I had been holding stocks because I own them already and not for their merit. I'm sure homeowners have experienced this bias the most while pricing their homes. Are there any other "biases" that I need to fix?

-Minyan James

Dear Minyan James,

To answer your question, let me walk you through a recent possible-trade set up that I encountered.

Below is a chart of Jos. A. Bank (JOSB), which was flagged as a short in my chart-scans a couple of days ago, when it broke the triage of 10-20 and 50-day moving average. I expected it to go to previous lows (35.8) and any failure to hold it would trigger a possible double top formation and make the $30 target very attractive.

Click here to enlarge.

However, there was one caveat: Check out the number of consecutive down days; something that I couldn't see for the past few months. So while it didn't mean that the stock won't go down, it could mean that the stock might have some respite from selling and have an up-day -- and that's when I decided to short it.
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No positions in stocks mentioned.

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