Here are some tips for forex trading. Have you done it?
There is an old saying, “Those who don’t have a plan are planning to fail.”
This may sound opportunistic, but it should be taken seriously as an axiom by anyone who wants to succeed, including traders.
Ask people who have managed to stay profitable and they will tell you: Trade as planned or fail.
FW Rongyu finance Xiaobian believes that if you have a trading or investment plan, congratulations!
You are on the side of the minority, on the side of truth.
While there is no 100% guarantee of success, the biggest stumbling block has been removed.
If your planning is inadequate or the technology you use is flawed, they may lead to your success later on, but at least you can adjust your trading schedule better.
In the process, you’ll learn what really works for trading and how to avoid repeated, costly mistakes.
Confidence is very important to a trader, but a trader’s confidence often fluctuates with the balance of his account. When you lose a lot of money, confidence often takes a hit.
When you make a lot of money, your confidence will explode.
Confidence is the cornerstone of success, and it is no different in trading.
However, today’s topic is not how to be confident in your trading, but how to avoid being overconfident.
Because inconfidence in trading can cause you to miss a big move, but overconfidence can cause you to suffer big losses.
What is overconfidence?
To put it more generally, people often have extreme confidence in their information or their own judgment, even though this confidence can make you fall to pieces overnight. This is called overconfidence.
According to Ekaterina Serikova, a trading behavior analyst at Currency.com, over-confidence bias can be seen all over the capital markets.
Overconfidence in trading is a dangerous thing. It can lead you to make irrational decisions and take risky market positions. People’s overconfidence is often caused by cognitive limitations.
Or in situations where it’s hard to predict the future trajectory, overconfident people tend to stick to their beliefs in both cases.
Psychology suggests that traders with this cognitive bias tend to be overconfident in their skills, believing they must know more about something than their peers.
A survey of 300 professional fund managers by James Montier, GMO’s asset allocation guru, supports this view.
He found that 74% of respondents thought they were above average when it came to investing.
Overconfident traders are more likely to take on excessive, outsized trading positions and believe they are superior to others, all of which can lead to failed trades.
What are the signs of overconfidence?
Overtrading A common sign of overconfidence is overtrading, which includes trading too often, taking large trades, and taking uncalculated risks.
A study by behavioral finance experts Brad Barber and Terry Odean found a direct link between overtrading and the overconfidence bias.
And over-trading doesn’t improve your profits.
They analysed the trading accounts of about 66,500 households at a large US discount broker between 1991 and 1996.
These households have an average annual return of 16.4 per cent and a portfolio turnover of 75 per cent.
However, those with the highest trading volumes returned just 11.4 per cent a year and had an average portfolio turnover of more than 250 per cent a year.
Below is a study of the relationship between trading frequency and investment performance of retail investors.
Investors from left to right are trading more frequently and aggressively, and it turns out that the more aggressive investors are, the less profitable they are.
For overconfident traders, here’s a sure thing: If you make a trade today and make money, you’ll feel like you’re awesome, and so will the trade.
When you get more confident, the next trade will be more positioning and aggressive.
However, if you lose money, you must feel that your bad luck is not your fault. This is self-credit.
That is to say, making money is their ability, losing money is not their problem.
Another manifestation of the illusion of control that is associated with overconfidence is called the illusion of control, and it can be seen everywhere in the investment world.
The illusion of control refers to the fact that people tend to make the mistake of equating the control of the process and the control of the outcome to such random events.
Feel like you’re in control of the process, and the better the outcome will be for you.
Let me give you a simple example.
Suppose we flip a coin, and if it comes up heads, you win;
Tails, I win.
Do you want to flip the coin or do you want me to flip it?
I think most people would choose to put in the coin themselves.
In fact, no matter who flips the coin, the outcome is not going to be better for anyone.
However, most people often choose to vote for themselves, which is the illusion of control.
In trading, many people thought that if he spent a lot of time and energy to watch the market fluctuations, it would have some impact on the trading results, which is an overconfidence in ability.
Although we all know that the market is not affected by the actions of these individuals, people still want to pay more attention to what is happening in the market when they trade.
In fact, paying too much attention to information can affect your judgment. In this era of information explosion, access to information is more convenient, which requires us to screen out some unnecessary information.
Confirmation bias Overconfident traders tend to have preconceived ideas, be very confident in their opinions, and tend to gather information that proves their opinions and ignore information that doesn’t support them.
For example, if an investor finds out that Company A is going to carry out asset restructuring, the stock is expected to rise sharply in the later stage.
He will seek various sources and channels to confirm it. When he gets consistent information from other people, he will be more confident and even believe it.
They ignore the risks and the information that doesn’t support the answers they want.
How to avoid the overconfidence bias?
No trader is perfect, and it’s hard not to be swayed by biases, so you need to create a plan that includes strict money management rules.
The more focused you are on money management, the less likely you are to fall into the trap of overconfidence when trading.
Dario, founder of Bridgewater, the world’s largest hedge fund, is a good example of how to be moderately confident.
He is certainly the top of the pyramid in the investment world.
However, he told foreign media that much of his success was due to avoiding the bias of overconfidence.
“I know that no matter how confident I am in my bets, I can still be wrong,” Dario says.
With this in mind, Dario plans ahead for worse scenarios and takes appropriate measures to reduce the risk of loss.
Here are some ways to overcome the overconfidence bias: 1. Be realistic about the market;
2. Be honest with yourself about your trading skills and abilities;
3. Carefully analyze the market pattern using charts, news and other available materials;
4. Listen to different opinions;
5. Write down your predictions and how you arrived at them, then compare them to the actual results.
Overconfidence stems from the cognitive bias of traders. Most people have this tendency. It will affect traders in different ways, driving them to pursue risks and trade frequently.
The result is often lower returns.
In the trading market, weakness and ignorance are not obstacles to survival, arrogance is.
Only by recognizing themselves can a trader be free from cognitive bias and be a slave to irrational trading.
According to Xiaobian, a simulation that starts trading at the same time each day helps to understand the movements of various currencies, because each currency changes differently at different times of the day.
At first, it’s hard to understand these changes.
Start and finish trading each day, read the market news and watch the exchange rate charts to help you make the right trades.
