Trade Results Based Confidence

Do you think that “trade results based confidence” is good for your trading? Click here or in the video below in episode 31 of the Trading Performance Podcast as we investigate this on a much deeper level.

Some topics covered are:

• Personal threshold of possibility
• Sensitivity to pain and criticism
• Eroding self confidence
• Fearing failure
• Searching for evidence to create confidence
• Dangers of relying on prior results for confidence

Intrigued by the book Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets, we dig deeply into using trade results based confidence and how that translates to traders.

Anyone who regularly trades should know, based on hearing repeated disclaimers that say something like “the past performance of a trading strategy does NOT indicate the future performance of that trading strategy and should not be relied upon.” Which means that past trade results should not be be relied upon as evidence of the future performance of a trading strategy. This being the case, why do so many traders still rely on the past to predict the future? And why would they use that past information for their confidence?

When a trader relies primarily on recent trade results for confidence, he needs constant positive feedback to be able to trade the strategy and increase the trade size. He also sets himself up to be easily thrown off track with a normal loss because the evidence he was relying on for confidence is no longer valid.

To maintain externally based confidence, not only does a trader need to win more often than he loses, he has to win constantly. This is because emotionally, the trader not only needs to have positive short term results, he also needs to FEEL as if he has concrete evidence for future wins from short term results. This is a much more difficult standard to achieve. Based on studies found in Fooled By Randomness: The Hidden Role of Chance in Life and in the Markets book, “the pain from a loss is approximately 2.5 times more painful than the feeling of the reward from a win”. Keeping in mind that the pain from the loss may actually be even much greater than that, depending on the trader’s reliance on those results for confidence. This dynamic makes it extremely difficult for a trader who relies on trade results for confidence to remain consistent enough with their trading strategy, and trading size to receive the benefits of the strategy.

What does the typical trade results based confidence trader do when his trade results stray too far in the loss column? It is on to the next trading strategy that has past performance that matches his trading goals without ever looking back at the last one that also had past performance results that matched his trading goal. Only to repeat the same experience, wasting a lot of time, money, and potential profits.

Learn more in this trading performance podcast episode!