Vice Number 3: Overconfidence

It is common for traders to complain of a lack of confidence in their trading, but, very often, it is overconfidence that does them in. Overconfidence results from a lack of appreciation of the complexity of the markets and an underestimation of the challenges of trading them successfully.

In a sense, overconfident traders lack respect for the markets. They think that reading about a few setups or buying the newest software will prepare them to make money. Overconfident traders don't want to work their way up the trading ladder: They resist the idea that screen time is the best teacher. They also chafe at the idea of growing their account.

Rather than start with one contract and wait until they're profitable before trading larger sizes, they want big positions -- and profits -- right away. Because they're so eager to make money -- and so sure they can make it -- overconfident traders generally trade impulsively. They won't wait for the setup to form; they'll jump the gun -- and get whipsawed in the process. Instead of being patient and waiting for short-term patterns to align with longer-term patterns, they will take every trade, enriching their brokers in the process.

The hallmark of overconfident traders is that they think they are going to make something happen in the market instead of patiently waiting to take what the market gives them. Spelling out profit goals for each day or week of trading is one manifestation of overconfidence.

Humble traders know that markets expand and contract their volatility -- sometimes, the trade just isn't there. The overconfident trader, however, feels that he or she is bigger than the market. Indeed, overconfident traders will often take great pains to try to catch the tops of bull swings or the bottoms of corrections. As a result, they often fight the market trend -- and can get run over in the process.

If the emotional signs of perfectionism are anger / frustration, and the emotional signs of ego involvement are elation / depression, the emotional signs of overconfidence are impatience / impulsivity.

Overconfident traders overtrade. They fear missing opportunities more than they fear losing money. The antidote to overconfidence is rule-based trading and the intensive rehearsal of trading rules. By making entries, exits and stops and position sizing, as well as being rule-governed and vigorously rehearsing trading rules during simulated trading (and in real time with small positions), traders can greatly reduce their impulsive trading.

Very often, this means training oneself to focus on (and rehearse) what-if scenarios of being wrong in the market, as well as forcing oneself to spell out the rationale, targets and stops for all trades. By making trading a more self-conscious process, traders interpose thought between impulse and action, gaining greater control of their trading. When the trading room admonishes, "No boasting, just posting," it is encouraging restraint rather than overconfidence.

Putting It All Together

Clearly, the three vices are not completely independent of one another. There can be significant overlap for traders. For example, a trader might take a position out of overconfidence, then hold onto it out of ego-related stubbornness and pride.
Whether the vice is perfectionism, ego or overconfidence, the basic problem is the same: Making the trade about oneself, rather than about the markets. If you are thinking about yourself -- how much you'll make or lose, how well or poorly you've done, how much you're a success or a loser, how much better you could have done -- you can't be fully focused on the markets.

It's not about you. It's about the setups and the ability to read them. And, to read them, you must be one with them, immersed in them, so that you feel them, not just observe them.

You can't feel the markets and become lost in feelings of anger, frustration, elation, guilt, depression, impatience or impulsive need. The greatest vice in trading is to take it personally, to become so focused on the outcome of trading that you lose sight of the process.

If you are fulfilled outside of trading, your other needs will not infiltrate your decision-making and sabotage your entries, exits and money management. If you build yourself physically, socially, spiritually and professionally, you will find that the markets won't have to bear the burden of carrying your identity.