Saturday, 1 October 2011

Under & Over Confidence


A key factor in trading psychology is finding a balance between being over-confident and under-confident. Both are equally as dangerous, yet I think a mistake many of us make is to not worry about being over-confident. After-all, if we have a lot of confidence, it means we must be doing well. But I believe that over-confidence is possibly MORE threatening to our ability to succeed. When we are under-confident, we tend to play it safer. This can mean missed opportunities, exiting trades too early and becoming fearful of the market. But it doesn't often to lead to large losses. When we become over-confident, certainly in my experience, it can lead to loss of focus, corner-cutting and experimenting due to a feeling of 'invincibility'.

If we take our eye off the ball and start thinking we have 'made it' or that this game is easy, it has a nasty habit of kicking you in the teeth. All of my worst periods as a trader have been preceded by a period where I slacked off a little because I had been doing really well. Every time I start making big plans for the future, getting butterflies in the stomach, going into each trade as if I am unlikely to lose, it usually isn't long before I get caught out with a bad error. Then begins the frustration and the chasing and the downward spiral of mental madness.

I notice that some people think these things happen just because they made one error that won't happen again or because they were unlucky. But they don't look at the root cause of that error and the psychology behind it. What really made them commit that mistake? Often, it's easy to tell when it was related to a negative emotion such as fear, anxiety, stress or anger. But when it happens due to confidence? I don't think most people register that emotion as the source of a trading error.

Monday - Thursday this week, I was struggling with under-confidence due to a dwindling bank. Now, after two fantastic days, I know that over-confidence is an issue. You'd think I would have learnt from the past and that I would be able to control myself but these things can just creep up on you in a split-second during a match. One moment you are feeling fine, waiting patiently for an opening and all of a sudden - BANG! Out of nowhere you've clicked on the ladder and submitted a bet that isn't part of your strategy, just because you felt 'It's only once, it'll be fine!'

I have to admit that today, I already acted with a little over-confidence. I went in early and too aggressively on the Baghdatis and Radwanska games. I was supremely confident that both those players would win and that there was immense value on Agnieszka as she was priced as clear under-dog, when I made her favourite. I was correct on both counts but Troicki and Zvonareva both started better and forced me to sweat on nasty red positions for a few games. If I'd been more patient, I would've followed my strategy and gotten better prices and even bigger wins with less stress.

So even though I'm ecstatic with today's results, I know that my main goal for the next week is simply to keep my emotions under-wraps and not get over-confident. Because I believe it is the biggest factor that can trip me up on the journey to success now.

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