Bill went to bed early last night, woke up early, and is excited about starting the trading day. It’s a cool, sunny day, and Bill can’t help but feel rejuvenated. After a quick run, he can’t wait for the markets to open, so he can make a few winning trades. Bill thinks today is his lucky day, the day that he’s going to make a month’s worth of profits. Why not start the trading day with excitement and vigour? Drink some coffee to get yourself going. Work out to get your energy level up and your physiology moving. Think positively and believe that you can overcome any obstacle. Why not get psyched up?
Cultivating a positive attitude for the trading day may not be as simple as it looks. Traders must continually walk a tightrope between extreme overconfidence and self-doubt. The trick is to find a level of confidence where you can realistically evaluate the market action and accurately acknowledge your limitations, yet at the same time, avoid talking yourself into a state of cynicism and self-doubt.
Novice traders, especially, are infamous for overconfidence. Behavioural economists have shown, for example, that after a big win, young enthusiastic traders overtrade and take unnecessary risks. Enthusiasm can sometimes cloud your vision to the point where everything looks rosier than it really is. Humans tend to be efficient, but often poor decision-makers.
They are prone to self-serving decision-making biases that are ego-building but unrealistic. Humans have a natural tendency to see matters more positively than they really are. While trading, for example, novice traders may wrongly believe that other market participants will behave as they behave or that they have more control than they actually do.
Humans can indeed be self-serving in their decision-making, especially novice traders who are on a quest for early success. But that doesn’t mean that you need to live your entire trading life blandly fighting boredom. Getting psyched up has a time and place. You obviously don’t want to be so euphoric during a trade execution that you throw out your trading plan on a whim because you wrongly get a hunch that something bigger is on the horizon. When you are executing your trading plan, it’s essential that you mechanically stick with it.
This can be done by carefully outlining a trading plan with clear entrance and exit strategies. You should also decide beforehand what signals you will look to monitor the trade and make minor midcourse corrections. Surely, during the execution process of the trade, you want to stay calm and rational.
But what about while you develop your trading plans, can you be optimistic at this stage? While you explore your options, it can be useful to build yourself up. Remind yourself that you are creative, intelligent, and resourceful. It can help to get really psyched up: “I have rare trading talents.
All I have to do is get my creative juices flowing and I’ll be able to discover market opportunities that will pay off big.” While you’re trying to come up with trading ideas, there’s really no harm in thinking that you are omnipotent. You need to think creatively, and when you are excited, your brain physiology jumps into action. Ideas connect and reconnect, and suddenly new insights spring up. So there is a time and place for extreme optimism.
That said, during the idea generation stage, it’s also vital to calm down and rationally tear apart your ideas. Before executing the trading plan, you must make sure that you’ve accounted for every possibility that could thwart your plans. You should pessimistically question the feasibility of the plan. That’s part of the creative process: Enthusiastically let your mind run wild but then come down to earth and make sure your ideas actually have merit.
Everything has a proper time and place. During the idea generation phase of trading, you can allow yourself to get psyched up and feel omnipotent, but it’s also essential to question your ideas and evaluate their plausibility. And finally, it is vital that you curb your enthusiasm as you execute your trading plan. If you can control your emotions and impulses as you execute your trade, you’ll show the discipline you need to trade like a winner.