Confirmation Bias in Derivatives

Confirmation Bias is the tendency to search for, interpret, and favor information that confirms one's existing market position. A trader who is long on a derivative contract will actively seek out bullish news or technical analysis that supports their view, while dismissing bearish indicators as noise.

This selective processing prevents a balanced view of market risks and can lead to disastrous outcomes if the market moves against the position. In the complex world of derivatives, this bias often results in ignoring warning signs like deteriorating open interest or negative funding rates.

It creates a closed loop of logic that shields the trader from reality.