The best way to deal with overconfidence in Forex trading is to stick and follow your risk-management rules.
When you think you know, you actually know not.
When one becomes confident, they are likely to take in more risks than before or try to look for more profitable opportunities in the market.
But when they become over confident, they become unstoppable and have no fear at all.
With this kind of behavior, a trader thinks he has it all and can make a profit as long as he trades.
Though it is every trader’s prayer to be confident when dealing with the market, it is not good when it exceeds the limit.
The problem is, when you have too much confidence you end up making irrational decisions.
This causes your account to suffer.
Overconfidence in trading leads to ‘over trading and risking too much on the one trade. When trades go bad it wipes out most of the trader’s accounts.
When this habit is not controlled, it can prevent you from becoming consistently profitable.
How do you deal with overconfidence when trading Forex
There are 4 main ways to deal with overconfidence in forex trading.
1. Risk management rules
Your risk management rules should at least specify;
- How many trades you should hold at one time
- How much of your account you are willing to risk on each trade
- What position size you should use.
- What you should do when a trade doesn’t go as expected
- When you should trade and not trade
- Last but not least, how much of your account are you willing to lose before you take a break from trading and re-evaluate your trading strategy.
2. Have a trading routine
Start your trading day with a routine, trade with a routine and end trading with a routine
When you have a trading routine, you will revise your trading rules every time you are to trade, which turns into a habit.
A trading routine keeps you track and helps you to trade with discipline.
3. Have a trading journal
A trading journal will help you tract all your events of trading.
Your records contain your trading strategy, trading emotions, and the decisions you make before, during and after trading.
It also includes your entry and exit points on the trades. Last but not least, a trading journal has a record of all your success and failed trades.
Having such records, helps you to analyse your trading behavior, trading performance and the common errors you made while trading.
You have a chance to rectify your errors and make changes in your system if necessary.
You can easily deal with overconfidence this way.
4. Trading discipline
Your trading discipline starts with following your trading rules and your trading plan.
Trade only when you are supposed to and trade only your strategy. Your trading rules are important and they will save you from making stupid mistakes and decisions.
This will save your account from large draw downs and lead you to a consistent profitability.
How do you know overCONFIDENCE has taken over you
- If you ever find yourself thinking that you know everything about the market.
- That you have nothing more to learn about the market
- When you start to think you are right all the time and the market is wrong.
- That you can tell where the market will go or how it will react to certain news event
- If you find yourself trading too frequently than what your trading rules say.
- When you start taking trades with extremely large trade sizes on a single trade than what you have been using, because you’re sure the trade will work out.
- In case, you often jump right back into stopped out trades not because they give new entry opportunities but because you couldn’t believe you were wrong.
Over confident can easily lead to a big draw down on your account.
This is highly pronounced when you start over trading with large sizes and with no risk management.
Forex trading is a probability game and so we always expect a loss or a win and there is no way to know what trade will be a winner or loser.
The market doesn’t know anyone, whether skilled or not you can still make a loss. With this kind of arrogance you attract margin calls.
When you feel so in control of the market, that’s the right time you should calm down and revise your trading rules.
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