On the popular sitcom, “That ’70s Show,” Eric asks his father, “Bad things always seem to happen to me. Why do I have such bad luck?” His father replies, “Son, you don’t have bad luck. Bad things happen to you because you’re a dumb-ass.” Novice traders often feel like Eric. They make trade after trade and watch their account balance dwindle with each trade. They may feel unintelligent and thoughtless and think, “Why am I making so many losing trades?” At times they may wonder if they are thoroughly incompetent. But it’s all a matter of perspective. If you aren’t trading profitably, it isn’t because you can’t. It isn’t because you have bad luck. It is a matter of gaining experience with the markets and gathering rock-solid, reliable knowledge about them.
Awareness is the key to high performance. Top performers are thoughtful and completely aware of what it takes to perform skillfully. Dr David Dunning, a psychology professor at Cornell University, argues that poor performers are “blissfully unaware of their incompetence.” They overestimate their abilities. Their intuition tells them that their performance is superior, yet objective estimates show their actual performance is under par. For example, when people are asked to take a test measuring abilities, such as thinking logically, writing grammatically, and spotting funny jokes, they tend to overestimate their performance: they think they are performing well above average, yet their actual performance is in the bottom 25%. These biased estimates aren’t restricted to taking tests.
People in a variety of settings and skill areas overestimate their abilities. Debate teams in college tournaments wrongly think they are eloquent debaters. Hunters who are bad shots think they are expert marksmen. And medical residents think they know how to diagnose patients more accurately than they really can. Studies have even shown that when people are offered money to estimate their performance accurately, they still can’t do it. Behavioural economists have similarly demonstrated that novice traders and investors overconfidently trade beyond their skill level.
When traders are unaware of how low their skill level actually is, they are likely to think that they are victims of bad luck. In reality, however, they merely have the wrong perspective. They may think trading is easier than it is. They may trade a small account and expect miracles. They may trade by the seat of their pants instead of formulating sound trading plans and following them. They may think that profitable trading setups will just fall in their lap, rather than spending time searching for those rare moments when huge profits can be taken from the markets.
Trading isn’t something people can learn in a short time. It takes years to fully understand the complexities of the markets. Market conditions change and the only way you can stay ahead of the game is to be a curious student of the markets who continually develop his or her trading skills until long-term profitability is realized.