Confidence

Many, including myself, have almost humble-braggingly called out our own "overconfidence" in trading. This comes, we claim, after either believing in our own abilities so much that we don't know our own limits (and went too far), or had so much success that we just got too cocky and lost control. While overconfidence is indeed a real problem for traders, I think we need to step back and actually question what it means to actually have confidence.

Confidence from a statistical standpoint is simply a measure of probability. That is, if one has deemed a scenario to be very likely to occur (say with 80%+ probability), one has good "confidence" in the scenario playing out. However, we need to question whether our actions actually reflect confidence or something more emotionally daunting -- like fear of losing or greed. When a trader who just had a great winning streak tries to "round out" the month with a final winner to catapult one's account to new highs, but instead holds onto a clear loser in hopes that it recovers and reaches that high, that's not confidence -- but a clear need to win. The sheer need to "score" a new high has caused the trader to act irrationally, and instead of taking the loss and moving on, he has compromised his decision-making capabilities, and any hopes of achieving that profit target in the meantime. In fact, this is often a disaster in the making, where the trader will double down and not accept the fact that his majesty could possibly lose big after such a great month of trading. Unfortunately, this may sound all too familiar.

Something that occurred to me in the process of thinking about these types of pitfalls is that true confidence is reflected in the ability to step away and accept a reasonable loss when it's clear the trade didn't pan out as planned - i.e. one is so confident in one's abilities and/or strategy that this one trade is immaterial, and the temporary loss is just part of the upward rising stair-step PnL curve. A bit like a pro athlete who brushes off a bad round of performance and just goes on as business as usual in the next attempt, knowing that one round/half doesn't make a season. What's funny is that what may separate an amateur from a pro may not be in technical trading ability at all, but in the ability to simply confidently go about one's trading, with losses accepted as part of the game. Even at the highest levels of sports, you'll see huge swings in results, often for such differentiations in one's mindset and mental game. 

The lesson here is that by learning to lose with grace, you're actually establishing yourself as the most confident person in the room -- because you know you can simply come back and kill it.