Confidence V Arrogance in Forex Trading
The world of forex trading is fast moving and competitive, and it takes a certain amount of confidence to set out your stall and take part. Along the way, almost all new traders experience their fair share of obstacles and setbacks, which is all part of the learning process.
Those with the determination to see it through will soon find a strategy that works for them, and will begin to taste the heady cocktail of excitement, success, and financial rewards that instant forex funding can offer. However, a run of good trades can sometimes lead to arrogance, and this is never a good way to approach the markets!
Overconfidence can be a very dangerous trait in the world of forex, because it can lead you to take unmanaged risks without enough objective evidence that the risk is worth the potential reward. In the worst case scenario, you could end up suffering damaging uncontrolled losses that leave you in serious financial straits.
On the other hand, an over cautious and timid approach to your forex trading is unlikely to bring you to a consistent level of profitability that makes it worth staying in the game. So how do you find that balance between being confident in your trading, and being hubristic and overconfident? Here are some points to bear in mind.
Recognise the difference between arrogance and self confidence
Before getting into more technical points, it’s worth spending some time thinking about the difference between arrogance and self confidence. Hubristic individuals who display high levels of assurance can sometimes be perceived as self-confident, and maybe they are. However, it is possible to be self-confident without hubris or excessive pride.
Arrogant traders believe that they are too talented or knowledgeable to fail, or even that they have some sort of magic touch. Unfortunately, all too often, this level of self belief is not justified by any objective evidence. Anyone can have a string of lucky breaks that might make them fall into this trap, but experienced traders will all tell you that luck runs out.
The truly self-confident trader needs to have a high degree of faith in their own abilities, but the difference between them and the arrogant is that they have good reasons to be confident. In other words, they have evidence that their skills and knowledge are based on sound and objective research and market knowledge.
Being self confident doesn’t mean denying all possibility that you might fail: in fact, it means the opposite. Real confidence goes hand in hand with humility, because it is impossible for even the most experienced trader to avoid risk and loss in forex trading. Good traders base their strategy mainly around risk management.
They are also always willing to listen to the advice and opinions of others, no matter how sharp witted or well educated they may be themselves. A good forex trader knows that they don’t know everything, and there is always something new to learn, or a different take on a familiar topic.
This doesn’t mean that they are willing to abandon their own strategy and be pulled and pushed around by every piece of advice that they come across, but rather that they have developed the independence of mind to objectively analyse new information, and put their own biases to one side.
The hubristic or arrogant trader will almost always push away advice without giving it any well balanced consideration, because they believe that they know best. This can lead to a narrow approach to trading decisions, and sooner or later the result will be less profitable trades or losses. A previous track record of wins does not guarantee future success.
The dangers of reckless pride has been a theme for artists and writers for centuries, all the way back to the scribes of Ancient Greece. The word ‘hubris’ (meaning excessive pride or self-confidence) comes from the Greek goddess Hybris, who was the personification of arrogance, conceit, and lack of regard for others.
Literature is full of examples of humbled heroes or heroines who fell to earth, quite literally in the case of Icarus from Greek mythology, who flew too close to the sun and melted the wax in his wings, despite being warned of the danger. It is a parable about the importance of humility which is very pertinent to forex trading.
How to develop real self-confidence as a forex trader
One less discussed aspect of the tragedy of Icarus is that he was also warned not to fly too close to the sea, lest his feathered wings get wet and drag him down. This could be a parable for being over cautious, in life as in forex trading. The confident trader is always vigilant that they are flying well above the sea but not too close to the sun.
In less abstract terms, this means that their trading strategy is based on a good understanding of the way the forex markets work, some sound application of technical analysis, and knowing their risk tolerance. All this is underpinned by the ability to detach their trading decisions from their emotions.
This can sound like a lot to take on board, and it does take some time and discipline to make everything fall into place. There are no real substitutions for commitment and hard work when it comes to developing great trading skills. However, as with any overwhelming task, the best approach is to break it down into a series of smaller tasks, so let’s do just that!
Figuring out your risk tolerance
Before you even think about making your first live trade, you must first work out your risk tolerance. This means working out the maximum amount of money you can afford to lose on each trade and setting well defined boundaries. This way, you will always protect yourself from the kind of damaging losses that would affect your ability to pay for life’s essentials.
You don’t need large amounts of capital to open a forex account, because there is high leverage available, but this carries the risk of uncontrolled losses. Therefore, you should always trade with a 1 or 2% margin at the most, at least until you have a lot more experience.
Read up on market analysis
Knowledge is power, and the more background knowledge you have about forex trading, the more quietly self-confident you will feel. However, don’t feel intimidated or inadequate if you don’t have a degree in macroeconomics. It’s a huge topic, and no one can know everything. In fact, bringing too much into the mix can overcomplicate your strategy.
One of the best approaches is to learn about the main factors that influence the markets, such as differentials in interest rates, unemployment rates, and GDP of the countries whose currency values you are going to be trading.
Most new traders focus on a few of the major currency pairs, such as the US dollar, the Euro, the Great British Pound, and the Japanese Yen. Even if you do not intend to trade with the USD, bear in mind that it is the world’s largest currency, and what affects its value tends to cause a ripple effect throughout the whole forex market.
Learn some technical analysis skills
To be a confident trader, you should understand the basic concepts of technical analysis such as how to read line charts and trend lines. Once you have figured out which type of analysis works best for you, remain consistent in your approach rather than chopping and changing at every twist in the road.
Develop a daily trading routine
Planning out each day, so that you know what times you will be trading and what tasks you need to accomplish during each session can help you to feel more in control. It also mitigates against the risk of human error, because you can tick each task off your checklist as you go along.
Avoid revenge trading at all costs
Some people react badly when their confidence is shaken or their pride is wounded. A common pitfall is to ‘revenge trade’ after a painful loss, in an attempt to make up for lost funds or lost bragging rights. However, this is likely to lead to ill judged decisions, which are clouded by your emotions rather than based on objective analysis.
Instead, it is always best to step away and have a cooling off period after a bad result. Take a look at your reasons for making the trade, and try to work out what went wrong. How could you approach it differently? Knowing when not to make a trade is just as important as knowing the right time.
Above all, stay humble
If it’s all starting to come together and you are raking in steady profits, remember that this is not the moment to let your guard down. Sure, enjoy your success and reflect on what you have got right, but remember that you are never bigger than the markets. To remain competitive as a trader you need a constant system of checks and balances.