Beware The Confirmation Bias

Usually within the first month or two of our attempts to tackle trading or investing we are introduced to the concept of confirmation bias and the dangers it presents for anyone taking on such endeavors.  This weekend has provided me an opportunity to illustrate how this might happen to us while using social media.

Over the weekend I got a little “love” in a Zero Hedge article for some common memes I use for AgTwit.  The context of my tweets being used was basically something along the lines of “grains are down a lot, they might be cheap, some smart people think they might be bottoming, and look how bearish everyone is”.  Here’s an image of how it was presented:

fat finger love

I want to make clear before I get into this post that I’m in no way mad about this article.  I thought it was all in good fun, enjoyed reading it, and naturally I welcome the attention to my premium quality Ag memes. That being said, I want to draw readers attention to the fact that the writer of this article framed the presentation of these images as an example of the sentiment in the ag trader community and I think there is a warning for all of us with regard to how and why it was done this way.

Time for a little background on the anchor pics in particular.

About three years ago I began to have long conversations off-line with trader @statFutures and during those conversations we would discuss the broad global landscape for the grain markets to help form and talk through overall narratives and what it likely meant for Chicago board prices.  The reason we go through this exercise and continue to do so is to give ourselves an idea not of what is possible in markets, but what is probable and then from there both Q and I, while trading very differently, lean on various data for execution in our respective time frames and then monitor the broad narrative over time.  I take away much more from these conversations and offer far less than what Q does so I am extremely grateful for them.  If you’d like to hear a basic idea of what some of these talks have sounded like, listen to this.   This experience has been extremely valuable for me because while I’ve been around markets for quite a while I haven’t been trading grains that entire time and Q’s experience dwarfs my own in the space.  The broad global landscape that was introduced to me during these calls is what prompted something of an inside joke between the two of us and that’s how the anchor pictures were born.  Though Q and I focus on wheat primarily, the anchor meme originally started with Corn:

blog 1

I’ve highlighted the date on this which can be seen above, 11/13/15.  I’ve been posting it ever since.  Take note.

Then later, I made one for our dear friend Sybil (that’s wheat for the uninitiated, see Terms Used).  I’ve highlighted the date again on this, 3/15/16:

blog 2

So, that’s the story of the anchor pics and my warning here is simple.  We have all this great access to information via social media and the web now as traders but it’s of critical importance for us to understand the people that are saying XYZ, why they are saying it for how long they have been saying it, and how they utilize market data.  Basically if you are going to lean on this type of information to form your own trade plans you should have some idea of how the person you are making an example of trades for themselves.  Probably most important is to better understand the time frames they trade on.  I’d guess that about 70% of the arguments I’ve seen on twitter stem from the fact that people are operating under completely different time frames and they end up talking past each other as a result.

On the topic of sentiment I’ve been described several times lately on Twitter as being “bearish wheat forever” because those that have followed me for a while now have seen these anchor pics, especially for wheat, over and over and over and over and over and over…….and over again.  I ‘d make Marshawn Lynch proud.  This is what trading is all about, taking high probability positions repeatedly until the odds of success change or end entirely.  At that point we adapt.  Since I’ve been posting these anchor pictures the higher probability has been on the short side broadly speaking and also….I think they are funny.  What trading isn’t about is what you often see done on twitter which starts with something like “everyone is” and then someone goes on to pump whatever their position is by describing “everyone” as being on the other side of their brilliant insight.

Now, that being said, and this is why it’s so important not to read articles without further study of your own, especially when a single individual is used as an example of something, I’m also very aware we have started to push extremes in the sentiment department, and I’m looking at specific data and what it means in relation to this broad narrative I spoke about earlier. For example:

sentiment

a few more anchor pictures got posted, and then…….

s2

So, wrapping up here…..this happens all the time when you read articles about markets and you want to be alert for it as a trader.  Writers have an idea about market direction they want to present and they go out and find screen caps on social media or other analysis that helps support the set-up they are about to present for the other side of the trade (their side).  If you read this Zero Hedge article you will see several other examples of this within that article. Fact is, these anchor pictures have been used for nearly two years and the author chose not to mention that or present the tweets I’m showing you here some of which were just put on the stream this week where actual data is presented in relation to sentiment and a time frame is discussed.  Keep this in mind as you look around on the web at these sort of presentations, do your own homework, and continue to test your ideas and challenge your own biases.   I will continue to do my best to follow my own advice here.

Best of luck in your trading.

  • FF
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About Fat F1nger

Full time futures trader.
This entry was posted in Broad Market Observations, Corn, Wheat. Bookmark the permalink.

2 Responses to Beware The Confirmation Bias

  1. I enjoy your insight, information, educational items and humor. Please keep it up.

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