Have you found yourself in a position where you have felt like you are correct about everything? If yes, you should remain aware of it because this is one of the signs that you are being overconfident about your trading. We know that refraining from taking new opportunities and challenges are often created from the fear and anxiety of losing money. Now, this is completely natural when your money is on the line. However, always being afraid of losing what you have and staying on the sidelines is just as harmful.
Therefore, traders need to be confident in whatever they do. But sometimes this confidence level crosses the boundary into overconfidence. Overconfidence is the mental condition when people forget their boundaries and think that they are the only right ones out there. However, overconfidence is just as harmful as being fearful.
When an investor is overconfident, they are likely to take more risks than he can take instead of looking for more realistic opportunities that match his trading style. Sometimes they become unstoppable and have no fear at all which is only profitable till he makes the right choices. But a person cannot help making mistakes sometimes. So, being overconfident often fuels a tendency to make mistakes and lessens the quality of their trades.
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Symptoms of overconfidence
For this reason, traders must learn to distinguish overconfidence from confidence and learn if they are overconfident or not. This will help you avoid going into a negative spiral caused by overconfidence. You might be overconfident-
- If you think that you know everything about the market.
- If you think that you have nothing more to learn about the market
- If you feel like you are right all the time and think that the market is wrong.
- If you are blindly trusting your speculations
- If you are overtrading
- If you are trading with higher leverage then you can effectively manage.
- If you suffer denial and fail to accept a loss
How to stay away
We have previously discussed how overconfidence can sweep away all your trading assets within a short period of time in if you don’t control your trading emotions. If you are not careful, you might also be putting your investment in danger. That’s why, to put a reign in this habit, we will be learning some tricks to aid you in your trading career. Visit this page and study the actions of the successful trader. Soon you will realize that overconfidence has no place in the investment business.
1. Risk management rules
You can follow some specific risk management rules to stay away from overconfidence.
- Set a limit to the number of trades
- Set how much you are willing to risk per trade
- Set your trading position and time
- Think about the alternatives in case your trade doesn’t go as you expected
- Learn when to trade and when not to trade
- Evaluate and revise your trades and strategies.
2. Have a trading journal
Traders must note down all the important events risk exposure, key functions to execute the trade, etc. in their journal. By checking the journal regularly they can easily improve their skills. When you have a trading routine, you will gradually form a habit of revising your trades and this will help you to trade with discipline. This will also help you to note down all your entry and exit points and keep a record of all your success and losses in your trading career.
Besides, you can also become a disciplined trader by following punctuality, regularity, and perseverance that will save you from making mistakes in your trade. At the same time, it will also prevent you from being overconfident and lead you to make consistent profits. You need to understand that overconfidence can be a big drawback in your trading.
Since trading is a probability game, there is no way to know if you are going to win or lose. So, always evaluate the trade signals by using strategic steps. Once you have executed a trade, be confident in your actions.