Discussion in 'Trading' started by Joe Ross, Apr 2, 2010.

  1. When learning any new skill, you need to find the right balance between pushing yourself to the limits and setting realistic expectations and goals. But whatever approach you take, you must work with what you've got. You must identify your natural inclinations and work around them. This is especially a challenge for trading. Generally, there are two basic types of novice traders: the fearful and the overconfident. Neither type achieves long-term consistent success easily. The fearful are reluctant to put on trades. They are easily frightened. Upon encountering the slightest signal of the trade going against them, they bail out. They don't make money in the long run. The overconfident, in stark contrast, don't show enough caution. They aren't afraid to put large sums of their trading capital on the line, even when their methods are questionable. They have a gung-ho attitude. They may stumble upon early success, but usually fail in the end. Fortunately, these are two extremes, with most traders. The rest of us probably fall somewhere in-between.

    It's useful to be a little fearful, but not too fearful. At least the fearful are sufficiently risk averse that they show enough skepticism to protect their interests. Some people are overly fearful, however. Their central nervous system is easily "activated" and when facing risk, it's unbearable. Traders with this kind of personality style are afraid to put on big trades, and while they are in a trade, they feel uneasy as they wait for the trade to reach the profit objective. Because they panic a little too easily, they sometimes have trouble sticking with their trading plan. They hesitate upon entering a trade, and may exit at the wrong time. Although it's hard for the extremely risk averse to trade in a calm, objective, and effortless style, it doesn't mean that they need to give up trading. Every trader just needs to come up with ways to work around their limitations. Even some professional traders are reluctant to enter a trade.

    The overconfident, trader doesn't show enough risk aversion. Overconfident traders think they have more skills than they actually do, and tend to put on trades without adequate preparation. There are many kinds of overconfident traders. For some overconfident traders, their trading behavior was improperly reinforced. For example, they may have learned to trade in a bull market where prices seemed to go essentially straight up. Or their first few trades may have made big profits, purely by chance, and they gained a sense of reassurance and a false sense of confidence because of this run of early luck. Others, ironically, only appear overconfident, but actually, they lack confidence, and just put on trade after trade to hide their feelings of inadequacy. Whatever the reasons, it's vital for survival to admit that as a novice trader, you do not yet have the requisite trading skills to trade with a solid sense of self-confidence. You should be a little skeptical and take proper precautions.

    Whether you lean toward the fearful trader or the overconfident trader, it's useful to identify where you stand on this continuum and take active steps to work around your personality. Relax, take it easy, and give yourself the time you need to master the markets. You'll feel better and trade at your best.