Confidence is a skill which let you trade in the markets flawlessly in the every condition. Meanwhile it is one of the most important quality of a trader can have. It doesn’t matter how much your strategy is performing well in the markets. If a trader is underconfident or lack of the confidence will end up losing the trade or missing the trade. Where as confident trader won’t miss a single opportunity to make the money or profits from the markets. Meanwhile there is thin line between a confident trader and a overconfident trader
It takes multiple of trades to build the actual confidence in trading. Where as overconfidence needs just a few random trades, ending in the profits. This happens most of time to the beginner traders in the market. After a few successful trades novice traders start getting overconfident and trades at the random levels. When their luck start getting fade away and the market starts behaving in their real manner, they end up making the huge losses or blow out their capital.
Having the knowledge about the confident trading and overconfident trading may help you to maintain the consistency and long term success.
What Is Confidence in Trading?
Confidence in trading is the unshakeable belief on your strategy, process instead of single trade result or outcome. It is mental clarity whenever the market taps your level and meeting all the requirements the the trade should be executed.
How Confidence is Built
How Confidence is Built
What Is Overconfidence in Trading?
When a trader underestimates the market’s nature and risk. Start behaving in the manner that they know more than the anyone else in the market. It often leads to overtrading, over risking in every trade and ignores stop losses.
Traps Of Overconfidence
Illusion of Knowledge: Traders believe that having the more information about the market may lead to the winning trades. They believe that on the basis of the information they found out their edge in the market. And it will play in the every market conditions.
Mirage Of Control: Overconfidence made them believe that they control the markets and they can move the market in any direction they want. This is very common among the novice traders when the market favours their mistakes for a while.
Self Obsessed Bias: This covers blaming the markets for losses and taking the credit of winning trades
The Key Difference Between Confidence and Overconfidence
Confidence in trading is based on when the traders has back tested data of the strategy, a proven strategy over the 100 trades. Trading rules, trading hours, fixed risk management, every trade has target price and stop loss and etc. Where as overconfidence is driven by the emotions, when the start thinking they are above the markets, start ignoring their trading system, market signals, market directions and etc.
Risk Management and Position Sizing
Confidence: A confident trader strictly follows their risk management rules and lot sizing. They have fixed set of rules which needs to be followed in the every trade. Like per trade risk, trades per session, fixed risk to reward ratio, daily loss limit etc.
Overconfidence: Meanwhile a overconfident doesn’t have any predefined set of rules for the trade. Their mostly decision are emotionally influenced and based on the results driven. In the view of making the profits, sometimes they risk their whole capital behind the one trade.
Market Approach
Confidence: A confident trader follows the market trend and plans the trades accordingly. However they know they can’t control the markets, instead they follow the markets. They solely focus how they can execute the trade followed by the market conditions and trading rules.
Overconfidence: Thes traders believes that they can surpass the markets natures by trading at random levels. They place trade without the valid setups, no valid risk to reward ratio etc.
Accepting Mistakes and Feedback
Confidence: Consider losing trades as the part of trading process. When a confident trader faces a losing trade, rather than blaming the external factors they try to analysis the mistakes involves while placing the trade.
Overconfidence: After a losing trade blames markets for no reason rather than analysing the mistakes.
Why Overconfidence Is Dangerous
Overconfidence occurs when you face consecutive winning streaks in the early stage of the trading career. Then this lead to develop the thinking i have mastered the markets and make the huge amount of money. It leads to the oversizing the position, avoiding setting the per trade loss limit and it continues to decrease the trading account size.
Key Pillars of Overconfidence
Over Leveraged Position: Over believing in their skill set which often covers trading with the high leveraged position sizing with the small trading account size. Additionally the trade without the stop loss in the increased position sizing.
Continue Trading: This factor make them believe that by trading more or constant trading you can earn more or make more money by it. This comes in the overtrading which eventually reduce the profits as well as reduce the trading account size.
Avoid Changes: The market moves differently everyday. Rather adapting the change of the market, they stick to the failing things and avoid the updates in themselves or in strategy according to the market flows.
How Traders Can Develop The Confidence Without Becoming Overconfident
Well it’s not very challenging to build the confidence without becoming a overconfident but it is not easy as it looks. Because there is aver thin line between these two terms, if anything goes here and there then it may impact the trading skills very efficiently. However it requires a shift from outcome based thinking to the process oriented thinking.
Ways to Build Long Lasting Confidence
Trade The Plan: While analysing the market for the intraday bias, decide the bias, mark the high probability setup, set the entry-exit price. Define the stop loss for the day considering the market conditions etc. After deciding everything which is require to place a good trade, stick to the plan while ignoring or avoiding the market noises. Don’t let the emotions take over the plan.
Practice The Process: Before assuming about making the dollar amounts, practice the process which you are gonna trade in the markets. Rather than focusing on capturing the big amounts once in a while, capture the small and consistent profits which gradually increases the account size.
Back Tested System: Before going live with the money on the strategy, learn to back test strategy to know the win ratio and authenticity of the strategy.
Ending Notes
Although these may have similar sounds at some extent, but these two terms has the power to grow someone or to destroy someone’s trading account.
Confidence is built on following the disciplined process everyday
Where as overconfidence is built on the recent winning streaks and avoiding the risk management.
The focus is to remain humble as much as you can. And show respect to the markets by accepting the result of the trade.
Overconfidence ruins the trading account. And confidence builds the trading accounts.
Read my previous blog on Why Confidence Comes From Execution Not Profits