Winning traders look at their odds of success objectively. Decisions are best made in a cool, calm and rational manner, but research studies have demonstrated that probability estimates are often biased by our moods. For example, when research participants are asked to make a probability estimate about whether or not a disaster will happen, such as their untimely death, the estimates are higher in an unhappy mood than in a happy one. Basically, people match their probability estimates to their mood.
When we are happy, or euphoric, we think the odds of success are high. In this state, we are likely to be overconfident when it comes to trading. In contrast, when we are in a pessimistic mood, we are likely to underestimate our probability of success. Ideally, a neutral mood where one is neither happy nor sad would be ideal, but it is hard to cultivate such a mood. Even when we are calm, we are likely to be a little bit on the happy or unhappy side, rather than right in the middle. Perhaps the best we can do is monitor our mood and account for it.
A bad or unpleasant mood isn’t conducive to trading. Although pessimists are often more realistic, when you are feeling down, it is difficult to meet the seemingly endless challenges and setbacks of trading. You feel like giving up when you often need to persist in the face of adversity. On the other hand, traders are infamous for over-confidence. They often over-trade because they over-value their skills. They may trade by the seat of their pants without a clearly defined trading plan. But all things considered, it is better to be an optimist than a pessimist.
Thinking optimistically can energize you and make you feel on top of the world. Trading takes energy and if you have a lot of it, you can trade more creatively and effortlessly. But, again, if you are too optimistic, you may take unnecessary risks and end up losing money on poorly devised trades. There’s a simple solution, though, make sure you manage risk on an any given trade and trade a detailed trading plan. Before you execute a trade, make sure that you have carefully considered all possible downsides.
What adverse events may go against the trade? What possible factor did you miss? By taking precautions to protect yourself, you can be optimistic without letting it get you off track. Our moods can undermine our trading efforts if we are not careful. If we are pessimistic, we may want to give up prematurely, but if we are optimistic we may act impulsively. By taking precautions, you can be optimistic and have an overly enthusiastic view without letting it ruin your trading performance by over-trading or trading impulsively.