Friday, July 18, 2014

Confidence in trading

The Oxford English Dictionary gives the definition of confidence as "The feeling or belief that one can have faith in or rely on someone or something".

In relation to trading, confidence therefore is having:
  • the belief in your ability to succeed as a trader;
  • the belief that whatever method you use for selecting entries and exits will help generate a positive expectancy;
  • the patience to wait for the right opportunities to present themselves;
  • the discipline to follow your rules;
  • the ability to keep taking suitable signals, when your criteria is met, even when suffering a run of losses.
In trading, like in sport or business, people tend to perform the best when they are most confident. It is a classic chicken and egg scenario: do you gain confidence by trading well, or do you trade well by being confident? 

Some traders talk of having an underlying confidence that, while they may lose on their next trade, or in the short term, in the longer-term, they know they will come out ahead. Part of this mindset is achieved by only risking a small element of their capital on each trade - this leads to an emotional indifference when a loss is suffered. The only element that separates them from achieving their goals is time. 

You cannot rush winning. You can only take what the market is prepared to give. Trying to force it will end up in losses - maybe big ones. Having good risk control and taking the inevitable small losses means that you stay in the game - this will allow you to get closer to reaching your goals. 

The simplest way to achieve this is to focus on the process, and let the outcome take care of itself. If your process has good risk control, has a positive edge or expectancy, and you have the required mindset to trade it with few or no mistakes, then you can take confidence that your approach is a winning one. It is then solely down to you to execute it.

The danger is that, after a run of trading well, you will start to get overconfident. Many Market Wizards talked about this in their interviews. They ended up suffering their biggest losses after a run of success and were trading very aggressively. Therefore, always try and ensure that you do not fall into this trap.

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