Friday, January 04, 2019

Why Trading With Confidence Doesn't Work

One of the interesting dynamics I've observed during this recent period of market volatility is that many traders see large moves and thus want to make *the* big trade.  They develop a market view and they trade that view doggedly, often ignoring actual price behavior.  

What makes this worse is that it masquerades as "confidence" and "conviction".  In reality, it is ego.  It is us saying we know what the market we do and then digging in and looking for opportunities to express our view, so that we can be right.  The need to be right can blind us to evidence that goes against our ideas--and it can especially blind us to opportunities on the other side of the trade.

We indeed see what we're prepared to see, which is why we should prepare ourselves for a multiplicity of scenarios.  Once we decide we *know* which scenario will unfold, we're no longer prepared to see what could unfold.  And that leads to losses and poor trading decisions.  Feeling strongly about a view is as much a risk factor as a trading virtue.

Further Reading: