Anchoring
Why do traders judge today's price against an older number, and what happens when that number has stopped being relevant?
In plain words
Anchoring is the habit of measuring a current price against some earlier figure — a previous high, a purchase price, a round number — and letting that figure decide whether the price now seems expensive or cheap, even after the market has moved to a level where the old number carries no information.
Why it matters
An old anchor can make a rising market look permanently cheap or a falling market look permanently expensive. Traders who size positions around a stale reference instead of current prices, volatility and structure can misjudge how much risk they are actually carrying.
In a real week: ETH, week of 4 February 2019
In the week starting 4 February 2019, ETH opened at 107.33 and closed at 125.12, a 16.58% gain, yet it remained 87.14% below its 52-week high. A trader anchored to that old high could read 125.12 as deeply discounted, ignoring that three of the four prior weeks were down (-25.82%, -4.69%, -4.18%, against one up week of 2.89%), the low of 101.21 arrived Wednesday, and volume was 0.55 times its 12-week average — the strong move was not yet broadly confirmed.
A common mistake
Assuming a low price relative to an old high is automatically a bargain. The reference high may reflect conditions that no longer apply to the current market.