Anchoring bias is the cognitive tendency to rely too heavily on the first piece of information you encounter (the “anchor”) when making subsequent judgments. In trading, this typically means being anchored to prices—your entry price, the recent high, round numbers—even when these prices are irrelevant to a stock’s current value or future direction.
- Your entry price has no bearing on where the stock will go next
- Past prices create “anchors” that distort perception of current value
- Ask: “Would I buy this at today’s price if I had no history with it?”
How Anchoring Bias Works
Your brain uses anchors as reference points, even when those anchors are arbitrary:
Classic Anchoring Example:
Stock at $100 → Drops to $70 → "Cheap, it was just at $100!"
Reality Check:
- $100 was never "the correct" price
- $70 isn't cheap because it's below $100
- Fair value depends on current fundamentals, not history
The anchor ($100) has no predictive power but
feels meaningful because you saw it first.
Quick Reference: Common Trading Anchors
| Anchor | How It Distorts Decisions |
|---|---|
| Entry price | ”I’ll sell when I break even” |
| Recent high | ”It’s cheap compared to the high” |
| 52-week high | ”It’s only halfway to its peak” |
| Round numbers | ”$100 seems like fair value” |
| Analyst targets | ”Analyst said $150, so $120 is cheap” |
| All-time high | ”It got there once, it can again” |
Example: The Entry Price Anchor
The Trap:
- You buy AAPL at $180
- It drops to $150
- You think: “I can’t sell at $150, I paid $180”
- The stock continues to $120
- Now you REALLY can’t sell: “I’m down so much”
The Reality:
- Your $180 entry is irrelevant to Apple’s value
- Apple doesn’t know or care what you paid
- The question is: “Is $150 (or $120) a good entry point NOW?”
What Would Have Helped:
- Selling at $150 and redeploying to a better opportunity
- Recognizing that $180 was just a data point, not “the true price”
Anchoring bias makes you rely too heavily on initial prices when making decisions. Your entry price doesn’t affect where a stock will go. Evaluate positions based on current value and future potential, not historical price levels.
Why Anchoring Is Dangerous
1. It Keeps You in Losers
Waiting to “break even” on your entry price can turn small losses into large ones.
2. It Creates False Bargains
A stock at $50 isn’t cheap just because it was $100. It might be expensive at $50 if fundamentals deteriorated.
3. It Limits Upside
You might sell at your $100 target because that’s where it “should be”—missing a move to $150.
4. It’s Invisible
You don’t realize you’re anchoring. The bias operates subconsciously.
Types of Anchoring in Trading
Price Anchoring
Anchoring to specific price levels (entry, recent high, round numbers).
Valuation Anchoring
“The P/E was 20 before, so 30 seems expensive”—ignoring that conditions changed.
Target Anchoring
Analyst price targets become anchors even though they’re often wrong.
Time Anchoring
“It recovered in two weeks last time”—expecting similar timing in different conditions.
How to Overcome Anchoring Bias
1. The Fresh Eyes Test
Ask: “If I had no position and no knowledge of past prices, would I buy at today’s price?“
2. Fundamental Valuation
Value stocks based on earnings, cash flow, and growth—not relative to past prices.
3. Technical Levels
Use current support/resistance, not historical prices you remember.
4. Avoid Round Numbers
$100 isn’t special. $99.73 might be more relevant based on actual levels.
5. Ignore Entry Price for Exit
Your exit criteria should be based on your plan, not your entry. The stop is where you’re wrong, the target is where you take profits—entry is irrelevant.
6. Multiple Perspectives
Before major decisions, explicitly consider alternatives. What if the anchor is wrong?
Common Mistakes
-
Thinking you’re immune – Everyone anchors. The question is whether you recognize and correct it.
-
Anchoring to losses – Holding to avoid realizing a loss is anchoring to your entry price.
-
Arbitrary targets – “I’ll sell at $200” because it’s a nice round number, not because analysis supports it.
-
Analyst target worship – Treating analyst targets as anchors when they’re often just guesses.
How JournalPlus Tracks Anchoring
JournalPlus prompts you to set exits based on technical levels, not entry prices. By comparing your exit decisions to your entry prices, you can identify when you’re letting anchoring bias affect your trade management.
