Thursday, May 7, 2015

Are You Too Overconfident?

Almost everyone's instinct is to be overconfident and read way too much into a hot or cold streak.
Nate Silver
Overconfidence usually reflects an exaggerated view of your ability. Overconfidence can be fatal for trading, where accurate and realistic perceptions of one's skill level are crucial. When traders are overconfident, they falsely believe that they can trade beyond their skill set. When people feel inadequate, they often tell themselves that they are superior in order to bolster their own feelings of incompetence, a process known as "ego defense".  Everyone feels inadequate every now and then, and thinking, "I'm doing great" can soothe unpleasant feelings of incompetence. It's probably not a good idea to do this very often, but doing so from time to time is relatively harmless, and it may even be a useful strategy when used sparingly. 

Telling yourself that you are a smart and brilliant trader has its time and place but do it too often and you may never look at your trading skills objectively. If you rarely look at your trading skills in an objective manor, how will you be able to take the necessary steps to build the skills you need to become a successful trader.

Overconfidence is a big problem, however, when you overtrade and do so impulsively. The overconfident trader may put on trades that just won't pan out. Over time, a great deal of money is lost, and it is hard to get out of the hole. At these times, it is essential to take a brutal, honest look at your trading skills. You must gain an accurate assessment of your skills, identify your weaknesses, and build skills to compensate. Focus on performance rather than potential rewards to your ego and social status. Doing so will help you develop an accurate view of your skills and a realistic level of confidence. And if you have an accurate level of self-confidence, you will trade more profitably.

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