Overconfidence

How should a trader deal with “overconfidence?” Maybe a better question about confidence--trading and otherwise--is not why people are overconfident to begin with, but why they stay overconfident. You see, the problem with overconfidence is not the innate bias toward optimism that most people seem to possess. That’s a good thing it keeps the world moving forward.

The problem is the inability to temper optimism as a result of prior experience. The truth is, we don’t learn well enough from our mistakes. Consider this: If overconfidence is as big a problem as some say it is, it should be a short-term problem at worst. The learning process would ideally go something like this: “We think highly of ourselves, the world and events show us who the boss really is, and we become less confident and more realistic about our knowledge and skills.” Yet usually, this does not happen. Why? It seems to me that what we face as traders is that we fail to mix confidence with caution. It is when we are on a hot winning streak that we begin to think of ourselves and our trading as invincible. I can’t count the number of times I have seen traders make a few nice sized wins and then watched them drift into a state of euphoria thinking to themselves: “At last, I’ve found ‘the’ way to trade. They actually become giddy. They are so happy with themselves. But as the book of Proverbs so clearly states: “Pride goes before a fall.” Overconfidence leads to pride, even as far as arrogance. It is then when a trader must rein himself in and put up the wall of caution. When you are overconfident, you are ripe for a major setback in the market.

 

Interesting post, Joe! Can you suggest some techniques on how to deal with overconfidence?

B.

 

Its funny because if trading your plan begets success (and a string of successful trades is usually the cause of overconfidence) then logically you should adhere to your plan more fervently than ever, instead overconfidence will often cause one to deviate from the trading plan and over rule it. Emotion/ego over objective reason. Thanks for the reminder Joe.

 

Overconfident (I'm invincible) and Desperate (everything I touch fail) are the two prime emotions that lead to failure. Being poised (Wait. Let me think, maybe other people know it too) is something in the middle of the two mentioned extreme emotions.

Edit: Watching Hockey last night between Chicago (Blackhawks) and Vancouver (Canucks). Canucks completely dominated the first two periods and had a comfortable led by 3-0. Playing in the third final period Canucks may had thought that they win easily, kind of overconfident. And then Blackhawks scored back to tie 3-3. Fortunately, it was just a game 1 on second round playoff, the Canucks were not becoming desperate (just cautious) and had managed to win the game at the end. If it were the final game 7 (on final round playoff) for the Stanley Cup championship then the Canucks may have became Desperate and then they probably lose that game and the cup.

The idea is that the trader's state of mind and size per trade (relative to account size) are matter.

 

Joe, AKA Hypo

why come back to this scum, you forgot why you left

I can't stand the crowed here myself, bunch of pseudo thinkers

 

'How should a trader deal with “overconfidence?”'

Price is the master, so when trading take commands from the price and rest should not matter.

In other words, have stops and when hit, accept them gracefully.

 

I agree what you said about extreme emotions will negatively effect trader's mind.

On the other hand, your example of a hockey game is some flawed. Like hokey, basketball and other sports shows; many games are rigged for purely entertainment purpose, which is total different from Olympic kind sport games.

 

you want to deal with overconfidence? go and volunteer at the homeless shelter for a month. after that go and volunteer for helping drug addicted and violent kids. Then on holidays go and volunteer at the food banks and help serve the homeless. After this you will become a humbled man and you will never think about overconfidence again.

 

Unlike REAL thinkers like yourself who can't even spell?

 

yeah well I am black person and trading so cut me some slack

I could've been robing your ass and doing house invasion

but here I am playin a white man game in peace

so cut me some slack