After recently doing a review of my last 6 months of trading, I recognized that my portfolio value over this period looked very similar to the Dunning–Kruger effect curve. (a psychological phenomenon that suggests people are not always the best evaluators of their own performance). The theory is often applied to trading because most retail traders experience a similar effect.
After spending 3 months of a practice simulator, I deposited real funds into a trading platform. Within the first week I saw a 24% increase which was shortly followed by loosing half my account value in the coming months. I then decided to take two weeks out and reflect on my performance. It was in these two weeks where I stumbled across an article called "5 steps to becoming a trader" (which I have linked to this post). I came to realize that I was completely incompetent. I didn't follow my trading plans, I got caught up in emotions and I was almost gambling money away in the hopes of getting rich quick.
The harsh reality is trading is hard. After a total of 9 month, I have only just managed to see a net positive return. I have spent thousands of hours only to be outperformed by an Index fund. One article won't change your performance, but these are some things that I learnt which could get you closer to conscious competence:
1. Don't trade with emotions, trade with your plan
2. Keep your risk/reward >1.75
3. Never risk enough money to loose sleep (enter each trade as if you have already lost the money you placed)
4. Reflect on performance and learn from mistakes
5. You don't need to win lots, you just need a mathematical edge
As a trader gains more experience, they become increasingly confident and more likely to see positive returns. Stay dedicated!!!
Such a great article! Thank you for sharing. I have had a similar experience. New trader as of March 2021. Jumped in without paper trading. Doubled my cash account through June 2021..
Then proceeded to lose all the gains over the next 4 months. I took 3 months off and studied.
Focused on foundational analysis, TA, and charting/indicators. In past couple months doing much better but was still not screening other that through Webull.
Serious now. Great app and such great content. Didn’t know what I was missing. Cheers to the green.
UnknownUnicorn32021811
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@c4shflushlioness, Appreciate the support. Im glad you have been doing much better.
Moshkelgosha
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@TradingView, On October 10th, 2021 I published the very same Title:"Psychological Roots of Failure in Trading" ..! The Dunning-Kruger effect The Dunning-Kruger effect is a type of cognitive bias in which people believe that they are smarter than others and more capable than they are. Essentially, low ability people do not possess the skills needed to recognize their incompetence. The combination of poor self-awareness and low cognitive ability leads them to overestimate their capabilities.
A Little Knowledge Can Lead to Overconfidence Another contributing factor is that sometimes a tiny bit of knowledge on a subject can lead people to mistakenly believe that they know all there is to know about it. As the old saying goes, a little bit of knowledge can be a dangerous thing. A person might have the slimmest bit of awareness about a subject, yet thanks to the Dunning-Kruger effect, believe that he or she is an expert. Other factors that can contribute to the effect include our use of analytical or mental shortcuts that allow us to make decisions quickly, and our tendency to seek out patterns even where none exist. Our minds are primed to try to make sense of the disparate array of information we deal with daily. It is perhaps not surprising that we sometimes fail to accurately judge how well we do.
Is There Any Way to Overcome the Dunning-Kruger Effect? Keep learning and practicing Instead of assuming you know all, there is to know about a subject, keep digging deeper. Ask other people how you're doing Another effective strategy involves asking others for constructive criticism. Question what you know Seek out information that challenges your ideas, as you learn more and get feedback, it can be easy to only pay attention to things that confirm what you think you already know. This is an example of another type of psychological bias known as confirmation bias.
Dunning and Kruger suggest that as experience with the subject increases, confidence typically declines to more realistic levels. As people learn more about the topic of interest, they begin to recognize their lack of knowledge and ability. Then as people gain more information and become experts on a topic, their confidence levels begin to improve once again. Please check it yourself..!
@Moshkelgosha, u didnt even hide the fact that is plagiarized. Its copied word for word from an article published on "very well mind" by Kendra Cherry. But your trying to advertise it on my post. You dont deserve 10k followers.