Consider a hypothetical stock trading at $30 that rallies to $38 over three trading sessions.
A trader sees the sharp increase and decides the stock has gone too high.
They notice that RSI is above 70 and begin expecting a pullback.
Rather than waiting for confirmation, they short the stock at $38.
However, the stock continues climbing to $40, then $42.
The trader becomes frustrated because the stock hasn’t behaved as expected. Instead of exiting according to their original risk parameters, they convince themselves that the rally is unsustainable.
They continue holding the position, hoping the stock eventually reverses.
This is projection bias in action.
Now consider a different approach.
The trader notices the same rally but recognizes that an extended move doesn’t automatically mean a reversal is coming.
They place the stock on a watchlist and identify important support and resistance levels.
They wait for a failed breakout, a lower high, or a confirmed breakdown before considering a short position.
If none of those conditions develop, they don’t trade.
The difference between these two approaches isn’t necessarily technical knowledge. It’s discipline.
The first trader allows expectations to dictate their actions. The second trader allows market evidence to determine whether an opportunity exists.
