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The Problem with Overconfidence in Trading

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Confidence is usually thought of as a good emotion – if we are confident in ourselves, we feel reassured that we can do anything. This is a great outlook on life, but when it comes to trading, confidence can be a negative emotion. Let us explain why.

Once traders become confident, they tend to become less receptive to criticism and less likely to spend time educating themselves. Some traders might feel that they are on a lucky streak, not unlike gambling. And just like with gambling, this often leads traders to take more risks and to lose huge amounts of money. There’s nothing worse than feeling on top of the world – and then losing it all due to your own stupid choices.

Overconfidence in trading results in something that has been labeled ‘King Kong Syndrome’. A trader suffering from this would experience a series of winning trades, which would result in them choosing to trade more. As they win more and more, those traders pay less attention to the market and convince themselves that they are riding on luck. The winning streak then comes to an end with a difficult reality check where those traders lose everything. The traders that are most likely to fall victim to this demise are beginners that don’t have a lot of trading knowledge. Using too high of a leverage or a huge lot size can contribute to the losses that these traders will experience. Many beginners have emptied their trading accounts because of this and give up on trading for good.

King Kong Syndrome is tied in with trading psychology, which involves the way that our emotions change our trading decisions. Fear and greed are major contributors to how we trade, but excitement and obvious confidence in oneself seems to be the major emotions connected to King Kong Syndrome. Remember that anyone can make this mistake, it isn’t only something that affects beginners. In fact, research shows that men – especially single men, are more likely to fall victim to overconfidence than women are. Beginners may be more prone to this phenomenon, but it can affect any trader out there.

So, how does one avoid making these mistakes and falling victim to King Kong Syndrome? First, you need to understand that confidence in your trades is important, but you shouldn’t feel overly confident. Conducting research and paying attention to fundamental and technical analysis is important, and they can help us feel confident about the trades we’re about to make. But we shouldn’t be too confident – no matter how much research you’ve done, you aren’t guaranteed to get the results you’re expecting. Always set a stop loss and watch how much you’re risking, no matter how much information you’ve gathered about the market.

Simply being aware of this problem is another way to avoid it. Having a good trading strategy also plays an important role. Without a good strategy, you’re basically just gambling with the outcome of your trades. Your plan needs to account for different market conditions and long-term outcomes. Don’t fall victim to overtrading, as most traders amass profits from making smaller, safer trades.

Never make the mistake of thinking that you’re too good to learn something new. No matter how long you’ve been trading, you can always get better and there is more information to learn. Those that give up on trading aren’t always beginners. Many of those traders once considered themselves to be experts or unstoppable, but a few big gambles and the King Kong Syndrome can change that.

Since King Kong Syndrome is tied to one’s emotions, you need to think about the emotions that you’re feeling when trading. If you feel overly anxious, excited, greedy, or anything else, take a break. It’s best to trade with a level head so that you can see the big picture without making hasty decisions. And this goes for overconfidence too – if you’re on a winning streak and you see yourself getting a big head, it may be time to clear your head and take a break. Remember that confidence is important, but too much confidence can cause one to risk too much and make bad decisions.

Being a successful trader involves doing a lot of research and having a well-thought-out trading plan with minimized risks. Good traders can control their emotions and never let them cause bad trading decisions, or they know when to walk away when their emotions are changing the way that they think. Don’t make the mistake of assuming that you’re the best trader out there and never rely on luck. Being a profitable trader comes down to strategy – luck is only an illusion and every winning streak will come to an end if those decisions aren’t made based on facts and data. Be sure to do your research and don’t allow yourself to wipe out your trading account because of King Kong Syndrome.

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