A Case of Bias Conflictus on SOA

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This is a guest post from a young trader, CP

Bias conflictus is a condition that can interfere with proper reads on stocks in a tape reading environment. This bias, for whatever reason, holds sway over the the obvious information on the tape. Seems a case of the ‘irresistible pull of irrational behavior’ (check out the book ‘Sway’ by Brafman).

In today’s case, SOA on open. The company lowers guidance, it’s in a weak pattern on the daily, opens lower, shows relative weakness on initial moves lower, trades from a held offer into holds on the bid. Bids hold at support, drop. At that point my job is to be short and add below. When the market is weak and we’re below the support level I want to stay short.

When the market is weak and the stock trades back above the support level and holds bid higher I must take notice. This is valuable information. I must notice when bids to cover get cut and I must pay the offer to get out instead of getting clean fills on bid, notice when the offers are getting sprayed out and the fills are .07 or .10 above the last held offer, yet drops of held bids do not spray lower. This requires focus. Clearly more focus than I applied to trading SOA this morning. I was on the right side of the trade lower on the open, yet lost money on the spray outs when stops were tripped, net negative on the stock for the day.

As the bids held higher with the market trading lower my focus (bias) was on being short when the offer held or if the held bids dropped. This ignores the obvious fact that the stock is demonstrating relative strength in a weak market (at the time) and the bids were NOT dropping. An unusual hold on the bid (15.0), large offers lifted cleanly in consolidation and then no large offers at a potential resistance level at yesterdays lows (15.14). This leaves room to trade to 16.0 or 16.18.

Why couldn’t I see this unusual hold on the bid or the taking of large offers in consolidation? I could. Why couldn’t I trade long off of this information? Because the stock was below resistance levels and the market was weak and the news gave me a negative bias. I wanted to see reasons to press this negative bias in a weak market more than I wanted to see the potential for the long on a strong tape. The tape was screaming strong. To dismiss this factual information in favor of my bias, to me, is irrational behavior and bad trading.

It’s a simple play. The play is get long small to start, get out if 15.0 bid drops or if offer holds below 15.0 consider flipping position if the market trades lower. Even if you expect to get stopped out below 15.0 the initial risk is small. As long as the offers can’t hold below 15.0 it could trade higher, get bigger. If bids can’t hold above yesterdays low then it’s a range scalp, if bids can hold above then it has room higher. Offers holding below 15.0 is a change of character, consider getting short.

Now the cause of such irrational behavior is acknowledged (bias) and hopefully can be interrupted and corrected in the future. Maybe today is something to build from. Feel the pain of lost opportunity cost in missing a clear chance to get long above 15.0 risking .05 and watching it trade from 15.0 into currently 15.60 and potentially 16.0/16.14. Feel the pain of missing one of the best fresh news opportunities out there today.

All because of bias induced irrational behavior.

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