Anchoring bias causes traders to fixate on specific prices - usually their entry price or a stock's previous high - and make decisions based on these arbitrary reference points rather than current market conditions. This leads to holding losers too long, missing new opportunities, and poor overall decision-making.
What Is Anchoring Bias?
Anchoring is a cognitive bias where people rely too heavily on the first piece of information they receive (the "anchor") when making decisions. Subsequent judgments are made by adjusting away from this anchor, but the adjustment is often insufficient.
In trading, common anchors include:
- Your entry price
- A stock's all-time high
- A stock's 52-week high or low
- Round numbers like $100 or $50
- Price targets from analysts
- What you "should have" sold at
- What the stock was worth at its peak
Key insight: The market does not care what price you bought at. Your entry price is irrelevant to whether a stock will go up or down from here. But your brain treats it as critically important.
How Anchoring Damages Your Trading
The Entry Price Trap
Once you buy a stock, your entry price becomes an anchor. If the stock drops below your entry, you feel like you are losing, even if the current price has nothing to do with your original thesis. You hold on, waiting to "get back to even," making decisions based on an arbitrary number rather than current fundamentals or technicals.
The "It Used to Be Worth" Fallacy
A stock that dropped from $100 to $40 is not automatically cheap. But anchoring makes it feel that way. You think, "It was worth $100, so $40 is a bargain." This ignores that maybe $100 was overvalued, or circumstances have changed. The previous price is irrelevant to future prospects.
Missing New Opportunities
If you wanted to buy a stock at $50 but it ran to $70, anchoring might make you refuse to buy at the "expensive" price, even if $70 is still cheap relative to the company's value. Your anchor of $50 prevents you from participating in a valid opportunity.
Inappropriate Profit Targets
Traders often set profit targets based on anchors like previous highs. "I'll sell when it gets back to its all-time high." But what if the market never returns to that level? Or what if fair value is actually much higher or lower? Anchor-based targets ignore current reality.
The Breakeven Obsession
Perhaps the most damaging anchor is the obsession with getting back to breakeven. Traders will hold losing positions for months or years, refusing to sell at a loss, waiting for breakeven - a price that has no significance whatsoever to the stock's future prospects.
Real-World Examples
The Dot-Com Anchor
Many investors who bought tech stocks at their 2000 peaks refused to sell as prices crashed. They were anchored to their purchase price. When Amazon dropped from $100 to $6, many held waiting for it to return to $100. Some sold at $6 out of desperation, missing the eventual recovery to over $100 - but only because their anchor caused them to hold through an unnecessary 94% drawdown.
The "On Sale" Illusion
Retail investors often chase stocks that have fallen sharply, viewing them as "on sale." A stock down 80% from its high feels like a bargain. But a stock that fell from $100 to $20 might still be overvalued if the business has deteriorated. The anchor creates a false sense of value.
Signs You Are Affected by Anchoring
Watch for these behaviors in your trading:
- Refusing to sell below your purchase price
- Waiting for a stock to return to a specific price before exiting
- Viewing a stock as "cheap" primarily because it used to be higher
- Setting profit targets based on previous highs rather than current analysis
- Refusing to buy a stock because it is above where you first noticed it
- Feeling that you "need" to recover losses in the same stock where you lost them
Strategies to Overcome Anchoring Bias
1. Ask: "Would I Buy This Today?"
For any position you hold, regularly ask yourself: "If I did not own this stock, would I buy it today at this price?" Your entry price is irrelevant to this question. If the answer is no, you probably should not hold it either.
2. Focus on Current Value
Base decisions on what a stock is worth now, not what it was worth before. Use current earnings, growth rates, and industry conditions. The past price was based on different circumstances.
3. Use Technical Levels, Not Personal Levels
If you use price levels for decision-making, use technical levels like support, resistance, and moving averages - not your personal entry price. These market-derived levels have meaning because other traders use them. Your entry price has no market significance.
4. Treat Each Day as a Fresh Start
Imagine you are starting each day with a fresh portfolio of cash equal to your current holdings' value. Would you buy back your current positions? This mental exercise helps break the anchor of your entry prices.
5. Use Systematic Exit Rules
Define exit criteria based on objective factors: percentage trailing stops, technical breakdown levels, fundamental changes, time-based exits. These systematic rules bypass anchor-based decision making.
6. Reframe Your Reference Point
Instead of anchoring to your entry price, anchor to your risk. Think about how much you are willing to lose on the trade, and measure decisions against that. This shifts focus from arbitrary anchors to meaningful risk management.
7. Consider Opportunity Cost
The money in a losing position could be deployed elsewhere. Every day you hold an underperforming stock is a day you are choosing it over other opportunities. Consider what else you could do with that capital rather than fixating on recovering from your anchor price.
Track Performance Objectively
Pro Trader Dashboard shows your actual performance metrics without anchoring to arbitrary prices, helping you make clearer decisions.
When Anchors Can Help
Not all price reference points are harmful. Legitimate technical levels serve as market-wide anchors that can inform trading decisions:
- Support and resistance: Prices where many buyers or sellers entered create actual market structure
- Moving averages: Widely-watched technical indicators that influence other traders' behavior
- Volume-weighted prices: VWAP reflects actual transaction prices and has market significance
The difference is these are collective anchors used by many market participants, not personal anchors based on your individual entry price.
Building Better Mental Habits
Practice Forgetting Your Entry
After entering a trade, practice mentally discarding your entry price. Focus on your stop loss, target, and current price action. The entry served its purpose - getting you in - and is now irrelevant.
Journal Your Decisions
When you make trading decisions, write down your reasoning. Review these later to see if anchoring influenced your choices. "I held because I wanted to get back to even" is a clear sign of anchoring bias.
Use Percentage Returns
Think in percentage terms rather than price levels. A stock at $50 that you bought at $100 is not "down $50" - it is down 50%. Percentages help you think about positions more objectively than absolute price levels.
Summary
Anchoring bias causes traders to fixate on past prices, especially their entry price, leading to holding losers too long and making decisions based on arbitrary numbers rather than current market conditions. Common symptoms include refusing to sell below purchase price, viewing fallen stocks as "cheap" simply because they were once higher, and obsessing over breakeven. Combat anchoring by asking "would I buy this today?", focusing on current value, using technical rather than personal levels, treating each day as fresh, and implementing systematic exit rules. Remember: the market does not know or care what price you paid. The only relevant question is what a position is worth now and where it is likely to go from here.
Learn more: loss aversion in trading and sunk cost fallacy.