Confidence is trait which a trader needs to develop to make money on consistent basis. Trading success is achieved when trader is able to execute trades confidently and overcoming trading emotions.
Traders can develop confidence in long run when they have a back-tested strategy on whom they trust without any doubt, a trading plan to work on as trader defines all aspects of his trade that he can control; the rest is left to the market. Confidence based on winning trades is fleeting, but confidence based on the ability to objectively execute ideas leads to long-term, unbreakable confidence.
Trading Confidence can further be divided into 2 categories:
2. Under confidence
Overconfidence occurs when the trader has had a string of winners and feels indestructible remmber the 2007-08 era when making money is so simple. A common statement of reflection once destruction occurs is usually something like: “I thought I knew more than the markets” or “I thought I had trading all figured out.” The trader usually begins to get sloppy in their trading and takes poor risk/reward trades, believing it will just work out for them. Hard-earned profits can disappear in a very short time if overconfidence is present — unless the trader has learned the techniques to recognize this.
Underconfidence occurs when the trader either can’t pull the trigger or has trouble staying with the trade because he lacks confidence in his analysis and price objectives. These errors result in lost opportunities and money left on the table.Under confidence is debilitating and must be overcome for a trader to ever become profitable.
I think many traders believe that if they just have a string of winners, that will give them the confidence they need to forge ahead. Yes, sometimes a winner can give you some confidence to get to the next trade, but what about the other side of the coin? The other side of the coin is a string of losing trades; this will destroy one’s confidence. Can a trader’s confidence be maintained even in the face of a string of losses?
After many ups and downs with “confidence,” I finally believe I have learned that my true confidence comes not with my winning trades but in my ability to control the losers and manage my trades. I noticed a consistent positive attitude that was associated and linked with how I was handling my losses. I started to feel good about how I would take a loss. There was an immediate down emotional feeling if I experienced a larger loss than necessary or exceeded a maximum daily loss. That led me to change the behavior in order to avoid the feeling that I didn’t like. Aha! I had control of that! I cannot control the markets, but I can control the parameters of my trades: entries, exits, stops, trading amounts, the number of trading positions, etc.
Recently a trader asked me during my trading course How You have Built your trading confidence. My simple answer to Him was “My confidence comes from my controlling the losers, not from the winners.” So excel in learning to manage your trade and feel good when Stop loss or trailing stop loss gets triggered. Make sure you stick to your trading plan. Losses are an inevitable part of trading, and you must accept them and be happy to take them as long as it fits within your defined framework. Knowing that you will never let a loss get out of control and knowing that you will never blow up will create an unshakable confidence and the winners will come.