Following on from last weeks blog on executing good trades, this week I will look at the issue of confidence from a trading perspective.
The dictionary definition of confidence is ‘a feeling of reliance or certainty’. Here’s another positive way to define it:- Confidence is thinking about, and concentrating on what you want to happen. Lack of confidence is thinking about, and concentrating on what you don’t want to happen. If you think about what you don’t want to happen in the trading arena there is a high probability that you won’t do the action that might produce what you don’t want to happen. Sounds a bit double Dutch but this simply means that without confidence you don’t execute thereby also eliminating the possibility of a positive outcome. Or you execute poorly. As trading is about constantly probing for opportunities to achieve positive outcomes, traders require confidence in their system and themselves to enable them to continually execute trades.
Confidence is a feeling and that feeling is determined by what you think. Notice, too, that confidence is defined as a feeling of certainty. This does not mean that the outcome that you feel confident about is certain, just that you feel certain about it. If you don’t feel certain, i.e. confident, then it is likely that you won’t execute the action, either at all, or as you intended. Why would anybody actually do an action where they feel they will lose compared to another action where they feel they will win? What I have learned is that the quality of our execution is based on the degree of confidence that we have nourished in our conscious and subconscious minds.
However, no outcome can be certain because there are simply too many variables at play in the universe that are beyond our control. These can affect the future outcome of any event, especially in the financial markets. It is important to accept this as a trader (or any other role in life) otherwise we may set an expectation into the future that we know (either through feeling certainty or some other basis) what will happen next and this expectation will attach us to the outcome. When we become attached to the outcome we put significance and meaning on the outcome and hence we set ourselves up for disappointment when the outcome is not what we expected. When we experience disappointment on an ongoing basis we become disillusioned about what we are doing and we spiral into programming ourselves to having a losing state of mind. As a result, we lose confidence.
This happens with the majority of traders, especially short-term and medium-term traders. How many times have you not executed trades that soar and you have found yourself saying: “I knew that I should have done that trade!” What actually transpired was that you weren’t confident about the trade (for whatever reason) so you didn’t execute or executed poorly by entering too late. The negative thoughts that popped into your head are a part of who you are and are an indication of your degree of trading confidence.
So how do we learn to feel certain about outcomes that we know are uncertain? This is a paradox. The market, like life, is full of paradoxes and uncertainty. As traders (or golfers or most other things in life) we need to learn to think about what we want to happen and block out the thoughts of what we don’t want to happen.
The things that we don’t want to happen, like losing trades, will still happen due to randomness or the limitless number of variables out of our control that interact in the market. But we can learn to detach ourselves from the outcome of trades. Doing so will overcome emotionally charging our reaction to outcomes, losing or winning outcomes. We can do this if we have confidence in the edge of the trading system we are using and by having a trading plan. Confidence in the edge of the system can be gained by understanding the probabilities generated by the system over time. If over a large sample of trades the system generates a profit and has a positive trade expectation, then this is what we must focus on. Being able to do this will generate confidence to continually execute signals to buy and sell, knowing that some trades will win, and some will lose but the edge is in our favour over a large sample.
To nourish confidence you must have faith and trust. But how is trust developed? Defining a trading process that you believe in and learning to both trust it and believe in it will be the topic of further discussion in this blog.