Who it's for — "Bargain hunters" who buy a free-falling asset just because "six months ago it cost triple, so now it must be discounted."
Anchoring is a mental trap in which one gives excessive and disproportionate weight to a single piece of past information (the anchor) when making decisions in the present. In trading, this information is almost always an old price.
In simple terms — A store sells a t-shirt for $200. Nobody buys it. The store puts up a sign: "70% Discount: now $60!". Suddenly everyone buys it, believing they are getting a deal, mentally anchoring themselves to the $200 price. In reality, the t-shirt is worth $10 and the company is making a huge profit. In the financial market, the "Discount" sign does not exist: if a price crashes by 70%, there is a structural reason for it.
The two faces of Anchoring
Anchoring destroys you in two opposite ways:
- Buying garbage (High Anchoring): "This token was worth $100 at its peak. Now it's worth $2. As soon as it goes back to its all-time highs I'll make a x50!". The harsh truth? 90% of assets that crash by 98% will never return to their all-time highs. You are buying a failed company by anchoring yourself to its old golden days.
- Selling diamonds (Low Anchoring): "I bought at $10 and it went up to $20. I will never buy at $30, it's too expensive compared to when I got in!". The best trends in history keep breaking high after high. If an asset is experiencing mass adoption, "yesterday's" price is irrelevant to "tomorrow's" price.
The market has no memory
You must internalize a brutal concept: The market does not care at what price you bought. The market has no memory of your portfolio.
The only question a trader must ask is: "Given the chart structure TODAY, is this asset more likely to go up or down?". If the trend is bearish (lower highs and lower lows), buying "because it dropped so much" is financial suicide (often called "trying to catch a falling knife").
Summary Sheet
- The Bias: Judging the current value of an asset based solely on its past peak.
- Typical Result: Buying assets in an irreversible downtrend believing you are getting the "deal of a lifetime."
- The cure: Evaluate the current price action. If an asset costs 80% less, ask yourself: "Why does the market (which has billions of dollars) value it so little? What do they know that I am ignoring?".
Links
- confirmation-bias — The bias that makes you hold the crashed asset even after buying it due to anchoring.
- technical-analysis — How to use real charts instead of mental illusions.
- percorso-bronzo
Module: Module 5 — Basic psychology and Mindset
Recognize when you are not trading the market, but your emotion.
