Many traders believe that after having the enough knowledge of chart’s, candlestick patterns and all, they can control market. In layman terms they can make money anytime. However the few successful trade trade often think they have mastered the markets. Meanwhile financial market influenced by the different factors such as, economic events, news releases, institutional activity etc.
However the only thing which can be controlled by the trader is their risk management, trading rules and controlled position sizing. Considering overconfidence as a skill, traders initiate to react on the every price movements and develop their strategic skill. Meanwhile awareness about the illusion of controlling the market, may improve discipline, psychology etc.
What Is the Illusion of Control?
The illusion of control in trading is the psychological bias, where traders overestimate their skill of influence or predict the random market moves. Meanwhile this involves the belief that their personal involvement, cam impact result of the trade. However by thinking in this way they believe they can end every trade in profits. As a result most of time it involves excessive risk taking and underperformance.
Why Traders Fall for It
The Desire To Do Something: Aligning overconfidence with mastery. Squander hours of analyzing the charts and making the false adjustments. Often give the trade false sense of productivity and control.
Active Involvement: Research shows that when traders are allowed to make the choices freedomly, they perform well. They feel more in control even when are the circumstances remains same.
Skill Cues: Using the countless of indicators, having an eye on the economic release or news release, watching the premium charts etc. By doing this trader made their mind believe that they can forecast the unpredictable price movement.
Why Traders Develop This Belief
Traders develop the false belief system illusion of control the markets. They believe that more hours of analysis, using multiple indicators and deep analysis. These things may help to remove the risk of the unpredictable outcome. The market runs on the probability approach by making each event full of unpredictability and uncertainties. Meanwhile the mind struggles to accept the nature of the market.
Key Drivers of the Illusion
Action Bias and Coping: The human dislike stillness in the market, when the market is hub unpredictability and uncertainties. Consecutive pressing the buy, sell buttons, and drawing lines on the charts. This give the false indication of feeling productive and safe. Meanwhile in reality there is nothing like that.
Over-Analysis: Using of multiple indicators and screens often complicates the trader. By continuous dealing with the complexities, trader’s believe that they have key of predicting the every asset.
Dopamine-Driven Reinforcement: Some winning trades often initiates the rush of dopamine. This delivers the message to the brain that prioritize profit rather than the skill. Meanwhile this encourages the trader to increase the trade unknowingly.
Apophenia: The human brain is wired in such a way that it finds patterns in random noises. While analyzing the past chart patterns, they believe that if this patterns repeat then the same result will come. But in reality brain process everything based on the past patterns but nothing goes according to the plan. Because the brain the past charts patterns doesn’t show the economical or news release factors which influence the markets most.
Winning Streaks Can Create Overconfidence
Continuous winning streaks is described as the one of the dangerous psychological trap. Because after the winning trade or streak flood the brain with dopamine. However this causes the trader to mistake short term luck for mastery and leads to reckless habits. As a result this involves abandonment of reduced position sizing, loss limits and overtrading.
The 3 Core Dangers of Overconfidence
Risk Creep: The illusion of house money forced trader to trade with the increased position sizing without evaluating the risk parameters. Whenever an ordinary pullback or correction happens, these traders often get panicked which damages the emotional and psychological factors of the trader.
Waning Discipline: Trader believe that their analysis and trading rules are checklist are optional or avoidable. Meanwhile they can enter in the position which falls outside of their strategy and trading rules criteria.
The Illusion of Control: The market never stops it’s movements under any circumstances. Meanwhile few consecutive winning trade will make you believe that every move or outcome is predictable.
More Analysis Does Not Mean More Control
Excessive analyzation of the charts develop false perception of control. Rather than the eliminating the risk, over analyzing the charts often make analysis more complex. As a result it leads to the analysis paralysis, contradictory signals and delayed execution.
The Illusion of Control and Analysis Paralysis
The human tendency to protect their hard earned money in the markets. However the uncertainties in the markets eliminate the protection of the hard earned money. Meanwhile every human’s desire is to eliminate the uncertainty from the markets. As a result in the view to eliminate the uncertainty from the markets, they often use multiple indicators, look for the perfect setup etc.
Meanwhile many research shows that simpler analysis surpasses the complex system. When a trader feels to enter in the trade, they wait for the on indicator to align, till then the trading opportunity passed. More indicators or line develop the conflict instead of accuracy.
Practical Ways to Overcome the Illusion of Control
The term illusion of control is the term where traders overestimate their ability to influence the markets. In the view of overcoming from this concept, traders needs a shift of focus from outcome based to the process driven. Right trading only happens when traders controls the risk, trade with the controlled position sizing. And manager the risk in the trade properly.
Shift to Process-Oriented Goals
Stop watching the P&L: The outcome of the every trade is the part of the probability and outside of your control. Rather judging the performance based on the p&l, measure on basis of the process.
Define Success By Execution: When the any trader execute the trade which is followed by the process. The outcome of a trade doesn’t matter. Because the following the process matters more than outcome in successful trading.
Automate Exits: Always execute the trade with loss limit. As a result it eliminates the emotional roller-coaster.
Journal Religiously: Maintain the trading record which records your trade entry to the trade exit. This tells you the mistakes and helps you to recognize the trading pattern.
Conclusion Lines
Every trade believes that after gaining the experience and spending hours on charts, they can control market. However the remains uncertain regardless of the how much year’s or hours you have spend on the screen and in the markets. The ultimate goal is control the decision not the outcome.
The only way to become successful in the markets is by controlling the decision not the outcome.