The overconfidence

When things go wrong, you feel regret and look for excuses so that your decision does not turn out to be wrong. On the other hand, when you make a profit, you grow proud, especially if you are at the start of your trading career, and this causes overconfidence and an overestimation of your skills.

When your confidence increases, something that often happens after closing several trades in profit, your self-esteem can reach very high levels, to the point that you are sure you can anticipate future market movements. You are convinced that your view, which is nothing more than an opinion, will actually turn into reality.

You overestimate your skills and, most likely, you start trading without discipline. You are so convinced that your opinion will turn into reality that you let all your losses run, believing that the market, in the end, will do what you expected all along.

Often, when the market moves against your expectations, you are convinced that everyone else is crazy and incompetent because they are doing the opposite of what you think. However reasonable these opinions may be, they remain opinions, which cannot be traded (another concept you will see explained later in this course).

This feeling can lead you to do things you would never do after a minimum of rational thought. You feel like the master of the market and are driven to take crazy risks that, with a bit more experience and rationality, you would never take.

So, do not bite off more than you can chew. The super trader syndrome is a weakness common to many traders, and those who know me know that it also happened to me in my first few trades. When things initially go well, due to the so-called “beginner’s luck,” you should never think that the battle has been won, or the market defeated.

Trading with the sole purpose of earning is not enough; you must always think carefully about what you are doing. Otherwise, you risk casually reinvesting your gains in other markets.

This is because, if you begin to feel like the master of the market, which may well happen (as it once did to me), despite what you might earn, even with a bit of luck, you will lose far more by feeling this way.

Beware of feeling too confident, of claiming that you have all the right information, the best trade, or even that the markets keep no secrets from you. No. You must always look for the middle way.

Do not get down on yourself after the first loss, and you should certainly not feel regret after a bad trade, because it is part of a trader’s job. There will be losses, and you have to learn to accept them without any drama.

At the same time, you should not become hyper-confident just because some of your trades closed in profit: you may have won a small battle, but there is still a long way to go.

Another aspect of being overly confident or too proud is that, very often, when you make a profit, you attribute a different value to that money than to the money you first invested.

For example, say you had $20,000 in your trading account. You earn $1,500, and with this money you become more aggressive. That is, you say: “Well, I have now earned $1,500, and with this money I can become more aggressive in my strategies, since it is profit.” As if that money were not your own.

Looking at the money you gain in this way is, in my opinion, a mistake, and I am the first to say that I did this myself in the past. Many traders tend to be less careful with the money they earn than with the money they originally invested. The fact that you have made money with a good trade does not mean that you should increase the risks you take with that money.

Many people are willing to take more risk with money they perceive as “earned,” as if they had found it by chance. But if you waste this money because you hold it in lower regard, you risk getting into trouble when you start making losses.

So, all this shows that it makes no sense to increase your risk when you are making money; it should always stay the same. The money you invest should have the same value as the money you earn. Doing the opposite is an irrational mistake, but you will often be inclined to make it anyway.

So, never forget: always respect your money, no matter how you got it.

Overconfidence vs Lack of Confidence

Confidence refers to a strong sense of belief and trust in your abilities. In trading, it allows you to have more faith in the decisions you make. A lack of confidence can prove to be an obstacle to achieving more, but being overconfident should also be avoided.

Overconfidence can work against what you are aiming for, blinding you to your own comparative advantages or preventing you from accurately determining whether the position you are in is where you want to be.

Overconfidence also works against you when you are faced with failures or obstacles that you strongly felt should have been straightforward and easily achievable. In trading, this often results in anger and impulsive behaviour.

If you suspect that you might be overconfident, well done: this is a signal that you are humble enough to deal with your confidence problems.

Pride and confidence, when doing tasks or forming opinions, actually rank second to logic and analysis. Do not let your confidence cause you to let your guard down, or to put in less effort than you should be putting into your work.

Thus, while being confident is desirable, be careful not to over-rely on your self-confidence or use it as a reason to procrastinate or to cut down on your preparation work.

The overconfidence effect is not limited to laboratory situations but has been demonstrated in many areas of professional life, such as investment banking, clinical psychology, medicine and others.

Unwarranted confidence in one’s own knowledge and competence can lead to reckless behaviour and a lack of openness to disconfirming information, which in turn leads to poor performance and severe mistakes.

On the other hand, displaying high levels of confidence can also be beneficial for two reasons. First, competence cannot always be measured. Therefore, others might not find out that a confident person is actually overconfident.

Second, overconfidence in one’s competence encourages actions that one would not undertake if one were less confident, but which may nevertheless be successful.