Overconfidence in Trading
Overconfidence as it relates to trading the market is something that is slightly beyond the beginner trading realm. It creeps up in the messy middle of a trader’s journey and can be quite a psychological challenge. When you get on a winning streak, either with your P/L or how well you are reading the market, or both, and things start to go really well, you can start to feel a little bit like you can handle anything.
Usually, it’s a lack of confidence that you initially face when learning trading from the ground up. It can be very intimidating, right? Interestingly, overconfidence becomes yet another potential to unintentionally self sabotage. It can sneak up on you when you’re feeling your best about your performance. Perhaps you’ve been making excellent choices and really honing your edge. Then you may have a day where all of a sudden things just did not pan out how you expected them to. Once you start to retrace your steps, it can become very clear, I was overconfident.
There is power in journaling to more clearly identify what transpired in your day. If you do that, if you acknowledge what your experience was, and dig into what may have contributed to your trading executions, it can help you identify contributing factors earlier. It's kind of insidious how overconfidence starts because you're just learning, growing, discovering all these cool things. You start taking really good trades. It can sneak in. I mean, you want to become confident. That's a healthy part of becoming successful at a new pursuit - the learning, growing and gaining confidence that encourages you to enter your arena every day. But it can also be a detriment early on if you don't manage it right and stay humble but also confident at the same time.
When you do feel like you're improving and you're having really successful days, that is precisely when you have to be even more selective and even more cautious because now you're protecting an even greater castle that has even more value, right?
“Sometimes it’s easy to get too excited about looking at the net profit after a large winning day. Large wins can do just as much to tamper with an even mindset as large losses.”
~ Linda Bradford Raschke, Maintain Your Mindset
There’s a saying we’ve heard a few times now: “new level, new devil.” We have referenced that so many times because as our trading has improved and progressed, that's been a factor every single time. When you achieve a higher level in your progress and think that now you have arrived, now you have gotten past that last level, that last benchmark. You've reached above that peak on the mountain and you think: this is it! Now I'm there... That can slap you in the face so hard because the market is not all of a sudden easier! It's still a very hard pursuit. And so you have to, in that moment, acknowledge that you did get to another level. But then purposefully aim to keep your head down and keep grinding. Do the same thing that you did to get to this new level. Stay neutral. Because if you start to feel almost a bulletproof kind of attitude - that just really doesn't help. You've got to try and keep it level and do your process that got you to that point, instead of starting to go lax on any part of your process. Because there is a new devil here and it's gonna hurt when you get to that next level and then you're knocked back down and you have to have to get back in the game from potentially a lower threshold!
We're not saying don't celebrate the wins. We wouldn't be humans if we weren't excited when we had a good P&L! But if you can approach trading from the business mindset where: of course I ended green because I'm a consistent day trader and I study and I executed my plan. So this solid green P/L is a natural outcome at the end of my work day. And tomorrow I'm gonna do the same thing again because this is my career now. I show up at my office and I execute my trades per my system. And so I don't need to be overly confident. These are just facts, and this is how I pay my bills and fund my life now. Approaching trading from a business standpoint is possibly the best tool to mitigate that overconfidence. Keep it level, do your job, and then come back the next day and do it again and just build your career and your bank account slow and steady.
Every time you leverage up in this game, you're going to have to combat this. And so to go in with your eyes wide open and be able to recognize it early and manage it is critical to leveraging up successfully and organically as your skill grows. Being evenly keeled is the goal. Anyone else feel us? This messy middle definitely has her devils to battle!