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Welcome to Part IV of this five-part series on trading psychology. So far, we have discussed three essential elements of trading psychology, i.e. discipline, emotion, avoiding negativity and staying positive. The fourth essential element in my opinion is to avoid becoming overly confident.

Guess what?  When you have a series of winning trades, your little devil will start telling you everything you want to hear. For example, your little devil may call you a trading guru because you are always right. You are a great trading master because George and Tom cannot get 100% in their trading career, but you are able to do so. You may even think you are better than George and Tom and no one out there can beat you.

Folks, when you suddenly feel that you are the best trader in the world, it will probably be one of the most dangerous moments in your trading career. I talked about emotion in Part II of this series in terms of fear and greed. Getting overly confident has something to do with the greed factor. Furthermore, this could create an adverse impact on your discipline, too, which is the subject matter of Part I of this series.

Let me give you an example. Suppose you have traded my BMIC system^TM ten times this year and so far there was not even one losing trade. Wow, you suddenly found that you are better than me because in my case, I did lose twice this year on my BMIC system^TM – one in July and another in August. So, you think that you know everything about the mechanics of my BMIC system^TM, and in fact you think you are better than me, the founder of the BMIC system^TM.

Here comes with the challenge. You put on the BMIC^TM for the eleventh time. Suddenly you are caught by the trade as it turns against you. You have not seen this situation in your last ten trades. However, because you are so confident in yourself, you think you can handle the issue. What are you going to do?  You say to yourself, let me adjust the trade so that it will salvage the trade and eventually it will still become a winner.  Having said that, you may have forgotten your original trading plan. Most likely you told yourself to exit the trade because taking a small hit is better than losing the whole farm.

See how your little devil can do such a fantastic job for you? Imagine that the worst-case scenario happens. Since you are so confident in yourself, you will listen to your little devil and make irrational decisions. You may even be in the state of self-denial because your mind confirms that whatever you do, you will never be wrong. More often than not, in this kind of situation, we hear that this so-called trading guru has his account wiped out because the trade went against him so badly and he did not follow his original plan.

To avoid becoming overly confident, I will tell myself that each trade is independent of each other. The fact that I have ten wins does not mean that I will win next time. So, I have prepared myself psychologically for my next trade. Next, when someone calls me a trading guru, I will immediately correct this person by telling him that I am not a guru. I am just a beginner trader and a student of Mr. Market. This method works for me in terms of avoiding becoming overly confident.

So, how are you going to deal with this issue? 

To access previous articles written by Jack Wong, please click here.

Jack Wong 
Staff Writer and Instructor
Optionetics.com ~ Your Options Education Site

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Recent Articles by Jack Wong, Optionetics.com

• December 1, 2008
  Lessons from My Grandmother, Part V: The Choice Is Yours
• November 24, 2008
  Lessons from My Grandmother, Part IV: Respect Yourself and Others
• November 17, 2008
  Lessons from My Grandmother, Part III: Taking Charge of Your Life
• November 10, 2008
  Lessons from My Grandmother, Part II: Dealing With Loss
• November 5, 2008
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