What is Anchoring Effect? – Market Profile Tutorial

The anchoring effect is a cognitive bias that describes the human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. Once an anchor is set, subsequent judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.

In the context of trading, the anchoring effect can significantly influence traders’ perceptions and decisions. For example, if a trader focuses on a specific price point as an anchor, their subsequent analysis and trading decisions might be overly influenced by this initial reference point, regardless of new information or market changes. This can lead to suboptimal trading strategies, such as selling too early in a rising market or holding onto a losing position in the hope it will return to the anchor price.

Who is a Anchor Trader?

An anchor trader is defined by a more immediate, decisive approach to trading, often focusing on short-term movements and price points that serve as “anchors” for making trade decisions. This type of trader contrasts with the developed trader, who takes a more calculated, longer-term approach. Here are the key characteristics and strategies often associated with anchor traders:

Decisive and Quick

• Quick Decision-Making: Anchor traders excel in environments that require fast decisions. They are adept at reacting swiftly to market changes, making them well-suited for day trading or scalping.
• No Attachment to Trades: They do not become emotionally attached to positions and are willing to exit trades quickly if the market moves against them. This detachment helps in minimizing losses and capitalizing on short-term market movements.

They frequently use specific price levels as anchors for their trading decisions. These anchors can include previous highs and lows, round numbers, or other significant market levels that are expected to influence price action.

What are Traditional Anchors?

Traditional anchors are specific, commonly used reference points or price levels that traders consider significant in their decision-making process. These anchors can be based on historical price data, statistical measures, or market milestones. Here are some examples of traditional anchors as mentioned in the summary:

1. Half Back Relative to the Entire Session: This refers to the midpoint of the trading range for a given session. Traders might view this level as a potential area of support or resistance.
2. Half Back Relative to the Prior 30-Minute Bar: This involves looking at the high or low of the previous 30-minute period as a reference point for making trades in the current period.
3. Previous Day’s High or Low: These are considered significant levels that can influence the current day’s trading, serving as potential support or resistance levels.
4. Half Back Relative to the Overnight Trading Range: Similar to the session half back, but specifically for the overnight market. It’s seen as an important level for gauging market sentiment as the regular session begins.
5. Prior Prominent Points of Control: Points of control are prices at which the highest volume of trading occurred during a previous session. These levels can attract attention in subsequent sessions.
6. Weekly, Monthly Highs and Lows, and Unfilled Gaps: These longer-term price levels and areas where the market has skipped over price levels without trading can act as significant psychological markers for traders, influencing their decisions.

Traditional anchors play a crucial role in trading by providing reference points around which traders might formulate their strategies. However, relying too heavily on these anchors without considering the current market context or new information can lead to the anchoring effect, potentially skewing judgment and leading to less optimal decision-making.