Trading is a confidence game…

As traders, we need to have the confidence to be able to hit the trigger when time comes to take action. We also need to have the confidence in our analysis to stay with the trade and not take profits too soon. After a few losers, we need to have confidence to trust our analysis, dust ourselves down and take the next setup.

So confidence is a major part of being able to function as a trader. In John Coates book ‘The hour between dog and wolf’, he discusses how testosterone levels can affect our confidence and subsequent ability to trade. But there’s one type of confidence which is very dangerous – over-confidence.

Overconfidence (elevated testosterone) usually occurs after a trader has had a great winning spell. They start to feel invincible and then depending on the individual are susceptible to one of two problems. One is they start becoming less stringent when looking for new trades. They think that it doesn’t matter if the next trade is a loser because they have made so much previously that it doesn’t matter. So they take a trade that becomes a loser, then another and another until they realise they need to tighten up their game. They needlessly give back some or even all of their previous profits through overconfidence and not trading with the same strict parameters that had helped them previously.

The second problem is much more dangerous and that’s where a trader with overconfidence decides to throw out the rulebook on risk management. They’ve had a great run and now with elevated testosterone, decide that risk management no longer applies to them. So they start taking bigger and bigger risks. Of course at some point they are going to take a very large loser which will set them back once more. The problem we have here is the trader may carry on trading with big risk in order to make back any losses quickly and this is why this is so dangerous.

As you can see, confidence in trading is an essential ingredient, but overconfidence is a major warning flag and needs to be regularly checked.

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EUR/USD Analysis

I will just briefly discuss the daily chart or the EUR/USD today. Last month, I said to keep an eye on the 1.1050 zone because if the Euro broke that, it could make a run higher. Well last week it did indeed break so we will now see if it can sustain this move and head towards that 1.14 zone I had previously mentioned.

Have a great week!

Charlei Burton, Ezeetrader

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