Types of Biases in Technical Analysis and How To Overcome Them

Introduction

Technical analysis uses historical data and trends to predict market movements. Biases, however, can have a significant impact on accuracy. We'll discuss key bias types and strategies to minimize their effects.

A Look at How Biases Can Affect Technical Analysis

Some common biases are confirmation bias, selection bias, survivorship bias, and information bias. The first bias, confirmation bias, is where analysts disproportionately rely on data to confirm beliefs. The second bias, selection bias, occurs when non-random sampling skews results. The third bias, survivorship bias, neglects failed entities. The fourth bias, information bias, introduces errors through inaccurate data collection.

These biases threaten integrity by distorting interpretations and conclusions. Understanding bias types is crucial, as is designing an unbiased study methodology. Robust data analysis, comprehensive sampling, and transparency can reduce bias implications.

Inherent biases also exist. One inherent bias is the efficient market hypothesis. It discounts irrational behavior. Another inherent bias is the random walk theory. Random walk theory oversimplifies complex dynamics. A third bias, over-optimization, customizes models too closely to specific data. The final inherent bias, recency bias, underweights older information. Countermeasures to these biases include incorporating psychological factors and robust model validation.

Overfitting trained data and underfitting complexity are common problems in predictive modeling, a key analytical tool. Cross-validation and stratification address these issues. Counter-anchored judgments reduce reliance on initial judgments. Some decisions can be automated through algorithmic trading.

Technical Analysis as a Tool to Overcome Biases

There is no such thing as perfect objectivity, but awareness and mitigation strategies can minimize unintended biases. Rigorous backtesting, diverse tools and patterns, and self-reflection through journals enhance accuracy. Technical analysis remains a powerful market analysis approach when deployed judiciously against biases.

How Our Expected Price Range Can Help Overcome Biases

Additionally, we recommend using our daily expected price ranges available at Stonksmaster.com. In concert with the above tools and strategies, our expected price ranges can help you see support and resistance levels through a different set of eyes. 

The Expected Price Range takes the last ten daily closes, adjusts for price momentum, and calculates what price range can be expected for that day's trading. It is important to note that the Expected Price Range is not investment advice, nor a recommendation to buy or sell. It is intended only as a useful addition to any existing technical, or fundamental analysis tool, that you may already be using.

The Expected Price Range is designed to be a neutral and unbiased yardstick, against which you can compare any existing support or resistance levels you have already highlighted to be of importance. In terms of probability, it is expected to perform equal to, or better than, a standard bell curve distribution. However, no guarantees or warranties are made here, and all decisions to invest should be made in consultation with your trusted financial advisor. By comparing any existing support or resistance levels you have already selected to the Expected Price Range, you can evaluate whether any biases have crept into your evaluation that need to be corrected.