I also think that keeping track of your forex performance and emotions when you’re winning is just as important. You wouldn’t want to lose your mojo while you’re on a winning streak, would you?
If you answered “No,” you better keep yourself from becoming overconfident. After all, there’s nothing like a string of winners to make a trader feel like he or she can’t make mistakes.
Overconfidence is usually characterized by an exaggerated belief in one’s own trading skills. Now, don’t get me wrong. Confidence is critical in becoming a successful trader. However, it’s one thing to believe that your trades can reel you in a handful of pips and it’s another to think that you know everything about the markets and that there’s no way for you to lose.
Overconfident traders usually get in trouble by trading larger position sizes than they’re used to, jumping in again in the same direction after getting stopped out, or overtrading.
If that just hit a nerve, don’t worry. You’re not the only one guilty of being overconfident. So how do you keep yourself from doing so? Here are a few of my suggestions:
The first step is awareness. You should ask yourself, “What factors can invalidate my trade idea?” or “What will I do when my trade goes against me?” From there, consider a few contingency plans. Through this exercise of making yourself aware that your seemingly-fail-proof trade setups can still end up as losers, you become more careful in managing your trade.
My second advice is to avoid being too eager in entering trades. As I mentioned, overtrading is one of the signs of overconfidence. Check your trading plan before you enter a trade. Does price action meet your entry criteria? If not, don’t just jump in because you have this “gut feeling” that that setup is gonna end up as a winner like your previous trades.
It doesn’t stop at entry criteria though. Just like how you would set a maximum drawdown stop whenever you’re in a losing streak, setting a cap for your losses is also as important as when you’re on a roll.
When you start losing after winning a few trades in a row, there’s a tendency for you to tell yourself that it’s okay because you still have a lot of money anyway. Although this might be true, the danger is that you may become lenient with your execution performance.
If you’re not careful, you might end up giving yourself a free pass on one loss after another. And before you know it, bam! You’ve already lost all your gains!
So be sure to determine how much of your winnings you are willing to lose. Let’s say you have already lost half of your most recent 3% gain, you may already want to take a little time off trading, re-consider your approach, and examine what you’ve been doing differently.
Ultimately, it all goes back to your trading plan. The best way to keep yourself from being overconfident is to establish a detailed trading plan and STICK TO IT!
Winning feels good, I know. Most of the time, it makes us feel like we’re invincible; that we can get away with a win on every trade. However, once you start to have this kind of thinking, that’s when you become most vulnerable to careless trading and your profits could evaporate in an instant.
Keep in mind that your goal as a trader is to become consistently profitable. So build on your wins by keeping your ego in check!
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Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.
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