March 30, 2011

Traders Ask: How Do You Detect Overconfidence?

Hi guys
After a rotten 12 months I’ve had a cracker of a month not just with the recent bull run but with the preceding drop also. This has occurred after stepping back, refining a trading entry methodology based around volume (exit and money management are already in place) and focusing on this play. Obviously I’m proud of myself, but pride comes before a fall as they say.
Past success runs have often been burnt with a bad run straight after. Can you tell me what techniques you offer your traders to identify signs of overconfidence and over-trading and to keep it (especially overconfidence) in check?
Great job asking the right questions.  Terrific work recognizing a pattern in your past that needs work.
Volatile swings in your P&L can be a danger signal of trading overconfidence.  Going from down much more than normal to flat is a very dangerous signal.  A big rip is likely coming.
Starting your pre-game preparation later than normal is something to watch. I am doing well I do not need to get in early.   There is a fine line between doing very well and underperforming.  A slight change in your start time can start a downtrend.
What are some warning signs for you that indicate overconfidence?
Mike Bellafiore

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