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Anchoring bias is a propensity to believe that the future is going to look extremely similar to the present. When traders anchor themselves too closely to the present, there is failure to see the dramatic changes that are possible as financial instruments fluctuate and the underlying fundamentals shift.
Risks of Anchoring
Anchored traders tend to get themselves into trouble by convincing themselves that the current trend will never end and that a reversal in the fundamental strength of a particular company is next to impossible.
Alas they become emotionally attached to the previous trend of a stock or index, and they continue to place trades that go against the new current trend. With each trade they lose more money because they are bucking the trend.
Overcoming Anchoring
The best way to overcome anchoring is to look at multiple time-frames on charts. If usually hourly charts are referred to, the daily and weekly charts should be seen to see where some of the long-term levels of support and resistance are and what the long term trends look like. One should also take a look at the short-term charts to see when the short-term trends are reversing. Broadening the perspective will help avoid anchoring to any one point.
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