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Overconfidence in Forex Trading
Written by: PaxForex analytics dept - Thursday, 22 October 2015 0 comments
The concept of overtrading indicates the situation in which you open too many positions with respect to the investment capital available, because you feel the need to always be in the market. It is a compulsive behavior that goes against every type of strategy. The overconfidence is certainly a big danger for a trader and it is an emotional state difficult to manage. Therefore, the consequences of a series of winnings can be more severe than those resulting from a series of losses.
Forex traders have to not only compete with other traders in the forex market but also with themselves. As human beings we are naturally emotional and most of the time these emotions lead us in the path of trading losses unless we learn to control and contain them. Overconfidence is an over-inflated belief in your skills as a trader. If you find yourself thinking that you have it all figured out, that you have nothing more to learn and that the money is yours for the taking in the forex market, than you are probably suffering from an overconfidence bias.
Overconfident traders tend to get themselves into trouble by trading too frequently or by placing extremely large trades. The best way to overcome this type of overconfidence bias is to establish a strict set of
risk-management rules. Such rules and such a mechanism should cover how many trades you will allow yourself to take, how much of your account are you willing to risk on any given position and how much of your capital you are willing to lose before taking a break from trading and re-evaluating your trading strategy.
There is no doubt that self-esteem and feeling good about ourselves is positive and can help us progress through our life. But, there is a difference between being confidant and falling into overconfidence. If we want to improve our trading we need to be able to admit that we can actually be wrong. Overconfidence can also lead us to make decisions without properly considering that things might not go according to our trading plan. You have to be comfortable with accepting that mistakes are inevitable, especially in the early stages, but it is all part of the learning process.
Most of the time our emotions lead us to trading losses, unless we learn how to control them. Many forex traders believe it would be ideal if you could completely divorce yourself from your emotions. Unfortunately, that is next to impossible, and some of your emotions may actually help improve your trading success. The best thing you can do for yourself is learn to understand yourself as a trader. Identify your strengths and your weakness and pick a trading style that is right for you.