In this video we're going to look at a common trading bad habit when we can
become overconfident and what that can mean for our trading. Hello I'm David
Jones from Capital.com and in this latest video we're examining trading
biases. We're looking at bad habits that we can develop along the way with
our trading and ways we can combat them. Within our trading platform we have a
bias detection algorithm and it tries to pick up on whether clients are picking
up bad habits and try to make them aware of it and steer them in a
different direction. This time around we're going to look at the problem of
overconfidence. Now you may think "well of course you do need to be confident when you're trading, confident in your approach and your strategy" but that can
go too far. So first of all let's take a look at how and when this overconfidence
starts. Let's examine this idea of overconfidence as a trading bias. So when
are we vulnerable to overconfidence? I think the really simple answer here is
after a run of profitable trades. So we have a series of trades that end up
being winners and it's easy to think that we've cracked the secret of the
market and we're never gonna be wrong again. So it feeds our ego these winning
trades and the tendency is that we're going start being maybe a little bit
too confident. The result of this is, one of the the symptoms of
overconfidence, [which] is we increase our trading size too quickly and we start
trading too big. So in our belief that we've cracked the secret and we're
not going to be wrong we take on more risk.
There's also over trading, [which] I think is a symptom of overconfidence. So let's say
we have a strategy that generates two or three trades a week and that's been
successful. There's the feeling now that maybe we can't do any wrong, so rather
than doing two or three trades a week, we start doing two or three trades a day. So
we're trading much more often than we were before - always wanting to be
in the market. So I think that's one thing that is easy to track you know if
you look at historically how frequently you were trading. Are you starting to
trade more often after a profitable streak, and ignoring our risk management?
This is a very dangerous one if you've achieved trading profits
by having a sensible plan and using stop losses. Suddenly we don't want to take a
loss if things start going against us after a series of winning trades
we're so convinced we're going to be right we start ignoring our previous
sensible risk management approaches. So we can see some situations there where
we're maybe vulnerable to becoming overconfident. Let's take a quick look
at some simple steps just to try and eliminate this and put ourselves in
check and back on track. So if we've identified these traits of
overconfidence how can we overcome them? I think the really simple answer here is
to stick to your plan. All of us should have a training plan of some sort or
another. So go back to it don't start thinking you need to trade more often or
trade a lot bigger, go back to the plan. Trading plans can be short you know they
don't need to be entire books on your approach to the market, but a typical
trading plan will include rules for: where you get in, where to place your
stop losses and how large to trade, you know, how much risk we're taking on the
size of the account. If we find that we're breaking these rules, you know,
maybe overconfidence is making us do that and that seldom ends well, so go
back to the plan. Don't be tempted to bend or break or slightly change the
rules after a successful run because don't forget following your plan in the
first place is what has given you this series of successful trades. So don't
throw it out of the window because suddenly you think you're invincible
when it comes to trading. So it is all about - it boils down to - sticking to your
plan. If you have a trading plan that's helped you with successful trades don't
throw it out the window, you know, after a ring a run of winners and then decide to
take on a lot more risk go back to the basics
and go back to the plan. I hope you found this video useful there'll be a whole
load more content that we'll be doing on this topic. So to never miss out just
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