Overconfidence is a curse for the novice trader. When people first start trading, they want to do nothing more than win. And in their quest for profits, they may take unnecessary chances and pay the price for it. But you can’t become a winning trader overnight. It takes time and practice. In his book, “The Way of the Dollar,” John Percival observes that inner confidence is “partly an inherent state of mind and partly the result of long experience of seeing the rules working.” Percival warns, however, “no one but a fool is convinced they can win just by playing. You win by doing your homework better, following the rules more closely, and acting more consistently than other players.” True confidence is the result of practice and experience. You must make trade after trade in a variety of market conditions until you genuinely know that you can handle anything the market throws at you.


Rather than take a fast-paced, rushed approach to learn to trade, there is a virtue in taking it slow when you first start out. Be patient. It may be necessary at first to build up a sense of confidence with a few key strategies. Psychologists refer to this process as building up self-efficacy beliefs. Self-efficacy is different from self-esteem. Self-esteem is a personality trait that develops over time and maybe the result of early childhood experiences. But low self-esteem can be conquered in the short term.

For example, a person can have low self-esteem yet believe that he or she can perform a specific task under a specific set of circumstances with a feeling of self-efficacy. A novice trader, for example, may believe that he or she is an average trader but when trading a particular trading strategy under specific market conditions, he or she may trade like a market wizard.

For example, suppose you know you can trade in a bull market using just a few key signals, and you know this strategy works best during the middle of the trading day. If you stick with this strategy and use it only under ideal conditions, there’s a good chance that you’ll achieve success and feel good about the progress you are making. The more winning trades you make, the more your self-efficacy beliefs will increase.  Once you build up some basic skills and a sense of self-efficacy, you’ll have the courage and confidence to try new trading strategies under novel market conditions, and your trading skills will continue to improve.

Research on self-efficacy has shown that when people believe they have self-efficacy regarding a specific set of skills, they set challenging goals, show unfailing persistence, experience pleasant moods, and can easily handle stress. These characteristics are conducive to profitable trading. Anything you can do to increase self-efficacy will help you master the markets and achieve long term profitability.

The two most obvious ways to increase self-efficacy are to start off trading with methods you have mastered so that you meet with initial success and increase your feelings of efficacy, and to practice and gain experience as a trader. The more success you achieve, the greater your self-efficacy, and the more likely you’ll be able to trade in a greater variety of market conditions and persist until you achieve enduring profitability. So build up your sense of self-efficacy and you’ll trade more profitably.

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