Lesson 2

How Overconfidence Can Destroy Your Trade

Confidence Is Great Until You Have Too Much

Overconfidence, like the greed factor, makes you take too many risks. But it's not about the itch for more profits. It's about getting too complacent with your trading style, or trying new trading strategies without testing them first on the demo (paper-trading). Worst of all, it's about trading this system that you see in a book without being formally trained in it.

Here are some typical indicators that you're trading with overconfidence:

  • You place a trade with very little prior research—you just dive in.
  • You stay in a trade past your predetermined exit points. You place a trade seconds before a major report is released, and you try to predict which way the market will respond (you're trading into an earnings release).
  • You add more shares to your trade and don't have enough capital to hold overnight, and then you find yourself holding more than 300 shares in one single intra-day trade.
  • You recklessly average down a trade and hold a losing position.

The telltale sign of overconfidence is inconsistency with profits and/or losses. For instance: you've been steadily making between $500 and $1,000 per day in profits, and then suddenly you're making or losing $3,000 per day. This means you've started trading outside of your consistency levels, and the reason is you're getting cocky.

Think about it. When you day trade, you must keep your levels uniform. That may sound boring and sometimes it is, but uniformity keeps you safe from reckless trading.

This will keep your confidence realistic:

  • Only trade stocks that have passed the criterion-selection test (this I clarify later). Only trade them once you've tested them on your demo (paper-traded).
  • Don't ever try to make “double” the amount on a trade—not until you're much more experienced.
  • Stay highly consistent when trading: trade in 100-share blocks, and then slowly progress from there. That's what I teach in my program. If you jump right in and try to apply a new system to more than one stock and more than 100 shares, that's overconfidence. Your failure is practically guaranteed. You're spreading yourself way too thin.
  • Always use the Golden Rules. Never stray from them. As soon as you do, you're trading on confidence and not trading the system—you're gambling.

In the past, some of my own biggest bloopers were seeded by overconfidence. If you're under my wing, I will not allow you to make my mistakes. You'll be way too busy struggling to apply all the rules and procedures and you won't have the time to get reckless.

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