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Overconfidence

  
  Education
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The perfectionist may never be really convinced that a certain market setup is right to enter into a position and the overconfident trader may neglect certain signals that the setup is not worth trading on.

A trader may become overconfident after a few successful trades. It’s very hard to fight the ‘I am the market God’-emotion. Making a number of consecutive successful trades is not necessarily a sign you have figured out how the markets work, the same way a losing streak is not a sign you’re a bad trader.

After a huge success it’s tempting to trade a larger size or accept more risk. The general idea is that simply because of the huge profit in the previous trade, more size and/or risk is acceptable in the next. But when you think about it, a realized profit is part of your account now, it’s no different than money made on earlier trades, it is money you worked hard for. There can be good reasons to increase trading size or risk, but that should be part of a plan, not just an impulsive decision based on a feeling of being ‘invulnerable’.

Ask yourself, which feeling is worse: losing yesterday’s profit, or losing the profit made 10 days ago? If that feels different, the first one being less worse, then it may be wise to stop trading for a few days after a good trade. During those days, the profit will slowly change from being ‘an extra’ to being ‘part of your trading account’. In other words, you get used to it and handle it with more care.

Overconfidence can also come from a (strong) conviction that the market has to go a certain direction based on a personal opinion about the economy, politics, the FED, interest rate, unemployment numbers etc etc. This kind of confidence has been discussed before. The remedy is simple: don’t trade the news.

Why do you think most traders fail?

  
  Education
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  1. Poor selection criteria; usually based on personal opinion, theory or tips and bad advice

  2. They don’t stick to and commit to an approach; style drift

  3. Don’t cut losses (#1 mistake made by virtually all investors)

  4. Don’t know the truth about their trading – they fail to conduct in-depth post analysis

  5. Treat trading as a hobby and not a business

  6. Want too much too fast; learning a skill takes time

There’s a lot of important meat in those few lines of text.  We all recognize that it’s not easy to cut losses, but I firmly believe that this results in more grief for traders than anything else.  What causes a trader to suffer a big hit?  I believe that it’s the unwilligness to accept that a trade is not working, and that it’s not likely to get any better if held longer.  Under those conditions, losses mount.  The only way to prevent that big loss is to cut it off at its knees – and the time to do that occurs when it’s a much smaller loss.The difficulty with that is sacrificing the possibility that the trade would turn profitable.  My advice:  Get over it.  Many trades will be unprofitable.  That’s a fact of life for a trader.

I understand that on a rare occasion a gap opening may do irreparable damage, and not provide an opportunity to take the small loss.  However, that’s also a preventable occurrence.  If the damage is too great, then the position was too large.  It really is as simple as that. 

How many of us look at trades after the position is closed?  How many dissect the entire trade in an attempt to find out what was done correctly and what mistakes were made?  Very few. 

A mistake is not a trade that loses money.  A mistake is making a decision that was clearly incorrect at the time, but the trader was unable to see that.  Another mistake is avoiding a trading plan and not doing postmortems on  your trades.  It all takes so much time.  However, if you take trading seriously, and do not consider it to be a hobby, there’s work to be done.

Mistakes are part of the game.  Making the same mistake repeatedly is not.  At least it’s not part of any successful trader’s game.

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