Anchoring in Trading: How to Break the Price Trap
What is the Anchoring Bias?
Have you ever held onto a losing trade because you were waiting for the price to return to your entry point? If so, you have experienced Anchoring in Trading. This cognitive bias happens when you fixate on a specific number, such as an entry price or a recent high. Consequently, you stop looking at the current data and start trading a memory.
At Maverick Trading, we have spent 20 years helping traders master their minds. We know that the market does not care where you bought a stock. However, your brain desperately wants that “anchor” price to be relevant again. To find long-term success, you must learn to cut these mental anchors before they sink your account.
The Danger of the “Entry Price” Anchor
The most common form of Anchoring in Trading involves your entry price. For example, if you buy a stock at $150 and it drops to $130, your brain “anchors” to $150. You might tell yourself, “I will sell once I get back to breakeven.”
Unfortunately, the market does not know your breakeven price. While you are waiting for $150, the stock might be signaling a further drop to $100. Because you are anchored, you ignore the new bearish signals. Therefore, you turn a small, manageable loss into a catastrophic one. At Maverick Trading, we teach our traders that the only price that matters is the one on the screen right now.
Anchoring to Past Highs and Lows
Anchoring in Trading also happens during market reversals. For instance, if a stock recently traded at an all-time high of $500, you might think it is a “bargain” at $400. You are anchoring to the $500 price tag.
However, if the company’s fundamentals have changed, $400 might actually be very expensive. Consequently, traders who anchor to past highs often “catch falling knives.” They buy because the price looks cheap compared to the anchor, rather than looking at the actual trend. Breaking this habit requires you to view every chart with fresh eyes every single day.
Why Our Brains Love Anchors
Psychologically, Anchoring in Trading happens because our brains seek shortcuts. Comparing a current price to a past price is easy. Conversely, performing a full technical analysis of a new trend is hard work. Your brain wants to simplify the world to save energy.
Furthermore, admitting that your anchor is irrelevant means admitting you were wrong. Most traders would rather stay anchored to a bad price than accept a loss. At Maverick Trading, we believe that trading psychology is the most important skill because it teaches you to value your capital more than your ego.
Practical Steps to Overcome Anchoring
You can break the hold that anchors have on your decision-making. Use these three strategies to stay objective:
1. The “Blank Slate” Exercise
Imagine you do not have a position in the stock. Look at the chart and ask yourself: “If I had zero shares, would I buy this stock at this exact price right now?” If the answer is no, you should not be holding it. This exercise removes the entry price anchor immediately.
2. Use Trailing Stops
To prevent Anchoring in Trading, use mechanical exits. A trailing stop moves with the market. Therefore, it forces you to react to what the price is doing rather than what you want it to do. This takes the emotional “anchor” out of the equation.
3. Focus on Percentages, Not Dollars
Anchoring usually happens with round numbers (like $100 or $50). If you focus on the percentage move of the trend instead, the “magic numbers” lose their power. Consequently, your logic stays in control of your execution.
Trading the Present, Not the Past
The market is a dynamic, living system. It moves based on new information every second. Therefore, Anchoring in Trading to an old price is like trying to drive a car while only looking in the rearview mirror. You must trade the reality of the chart in front of you.
At Maverick Trading, we help our members break these repetitive mistakes. By understanding anchoring, you can stop being a victim of your entry price and start being a professional manager of risk. Stay fluid, stay objective, and always trade the current price.
To see our full breakdown of psychological biases and how they affect your P&L, watch our video here: https://youtu.be/HCifzrq8IhA. We discuss how to identify these traps before they cost you a winning trade.
