How to Maintain Your Trading Confidence

Regardless of your current experience level in trading, everyone had to start at the beginning. I suspect that the emotions and anxieties were pretty much identical for all traders early in their development. And since then, each trade has gotten easier as your confidence has grown. That’s what a learning curve is.

Today I’d like to share two related ideas that should move everybody a little bit further down their learning curve. This will be good for the new-comers as well as the experts, but the traders near the middle of the learning curve will benefit the most. In a nutshell, to become a great trader, you have to do to things. First, master the internal ego. And second, defend the external ego.

1. Master The Internal Ego, So You Can Learn

The idea is a simple one – you must precisely recognize what is keeping you from taking your trading success to the next level. The vast majority of the time, it’s your ego getting in the way of your self-education. This isn’t the arrogant or over-confident type of ego. Instead, it’s more along the lines of a defensive, protective ego – the “I don’t need any help” ego. The problem is, that kind of self-shielding ego is what prevents real learning.

Let’s take a closer look.

We’re all human, and being human, we don’t want to admit that we are wrong about anything, including trades. The ego wants to uphold an ideal version of ourselves that allows for only successes and not failures. Many traders collectively lose millions of dollars trying to protect the ego’s version of reality. Your goal should be to trade without ego, or without personal judgment of your self worth. Trading is a business, and the businessmen who do the best at it are the ones who treat as such. It’s not a reflection of them personally.

In fact it’s usually just a reflection of a mostly-mechanized trading system. In order to make money trading, your goal is to keep losses small while letting winners run. Your ego is not equipped to do that naturally, but a mechanical trading system is. That’s why we’re such big fans of proven trading systems.

But aren’t you up against traders with a ton of experience and great trading systems? Absolutely. But remember, everyone follows the same learning curve, and nothing is free. You’ll have to spend time and effort to get good at this. How do you do that? Learn! The reality is that you chose to enter each and every trade.

Examine why the losing trades failed, and why the winners were successful. This can be painful, at least initially, since the ego is built to deflect blame yet accept praise (this is why we said the ego can create problems). That’s a trap. If you find yourself saying “that was a good trade entry but…” then stop yourself immediately. Either everything before ‘but’ or after ‘but’ is inaccurate. If you rationalize or justify poor trades, then you’ll never learn from them.

This is an important reality – the ego can prevent real learning. If you can learn to accept some failure without being emotionally devastated, then you’ll be a good trader. In fact it’s been said that the world’s top traders aren’t necessarily geniuses – they’re survivors. They lasted longer because a rough trade (or a string of them) didn’t spook them out of the game. In other words, they didn’t take losses personally since they realized perfection is impossible. In so doing, they learned a great deal just by being able to stay in the game longer.

2. Keep Your Trading Private, So Others Can’t Crack Your Confidence

So how much can other people affect your trading? There’s not enough space here to even really begin. However, there is one characteristic that seems to separate the great traders from the average ones. The great ones realize what kind of problems that a lack of confidence can present, so they don’t even risk a shattered ego. How? They keep their trading activities to themselves. While the amateur trader will often tell friends, neighbors, and total strangers about trades he may have entered, it’s all too often a setup for disaster.

Call it Murphy’s Law if you want, but one of the ‘sure-fire’ trades you just entered and told your neighbor about will turn against you soon. And like clockwork, the neighbor will ask how it panned out. You have one of two options at that point: tell the truth, or lie. You could lie to the neighbor and say the trade went fine. However, even though the neighbor may not know any better, the damage to our own ego is still a reality.

How? Being forced to deceive also forces us to acknowledge that we may have inferior skills. Instead of just accepting a losing position, we’re forced to conceal the trade to protect other’s perception of us. The irony is that the lie can cause even more damage to our confidence than just accepting the loss. Speaking psychologically, our subconscious minds can rationalize some incredible stuff that doesn’t necessarily have to be true, so don’t give it an opportunity to rationalize your decision to stop trading. You’re better off not saying anything than saying something you know to be untrue.

On the other hand, you could tell the truth to your neighbor and own up to a bad trade, but that would also negatively impact your confidence. You see, our perception of how others see us has a far greater impact (for better and worse) than our perception of ourselves. It may not be fair or logical, but it’s a fact nonetheless. And when we fail publicly – even at our own hands – we start to internalize and misinterpret external data, whether or not it’s accurate. In other words, our damaged ego affects our judgment.

For instance, the neighbor may ask “How much did you lose?”, while the trader may hear “Why didn’t you use tighter stops?”

The neighbor may ask “Why did you buy it in the first place?”, while the trader may hear “Can’t you do adequate research?”

The neighbor may say “Better luck next time.”, while the trader may hear “You have no business being in the market.”

You get the idea – enough of those innocent questions and the trader is no longer trading. Or worse, the trader has changed his or her trading patterns in an effort to regain some confidence. And all because he opened the door to his ego!

The only real defense against such an attack is to simply not share the details of your trading with others. There’s nothing wrong with telling others you trade, but in no way will detailing your trading activity enhance your return. In fact, it may potentially do the opposite. If you profess a trade position to someone else, you have made a subconscious commitment to it – maybe one you shouldn’t have. If you know someone may ask you about that position later, you’re more apt to hold it, even if it’s a loser you’d normally get rid of.

By not sharing your trades with friends and colleagues, you allow yourself to make mistakes free of criticism. You allow yourself to fail. You allow yourself to focus on finding better trades rather than proving someone else wrong. When you don’t have to worry about protecting your psyche, you can shift the focus from defense to offense – a necessary trait for all traders.

Price Headley – CFA, CMT, President & Founder of Price has been widely quoted by Barron’s, CNBC, The Wall Street Journal and USA Today. Price is also the author of the new book, Big Trends in Trading: Strategies to Master Major Market Moves.

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