How Over Confidence In Trading Is DeadlyPosted: January 29, 2014
Its Sunday afternoon and I am bored. I open my charts software to find a stock to trade next week. While flipping through my charts i find a perfect Head & shoulders bottom that is about to break out. I make a note of it and decide to buy it upon breakout, risking 1% of my portfolio. I go out see some friends for the rest of the day.
Monday morning and I am ready to take the position only IF the stock breaks out on a closing basis. I take a quick look mid day and decide not to look again until 15 minutes before the close. It almost 20 minutes until the close, I look at the chart and it has broken out Perfect!. I put my order and buy the stock 5 min before the close. I now have a position and I goto sleep.
Its Tuesday morning, I left work early so what should I do?
Yes! Why not check on my stock?, well its not up much on 2 cents..oh well give it some time..
I will look at some news related to the stock..Wow some interesting news that sounds bullish..
I take a look at the sector and most stocks are up YTD Nice!
I call a couple of traders to ask their opinion and they compliment me on my position! Great news!.
The market closes that day with my stock down 2%, very close to my stop loss.
Now what? I am very confident in my stock news/technicals/friends/sector all in my favor, I will lower my stop loss and risk 2% (doubling my initial risk)
Its Wednesday mid day and my stock is down another 1%. Technically the stock has made a hard retest into the pattern and made it null. But I forget about technical analysis and focus on all the positive news more every other place. I look at twitter and find others recommending it as a good buy. I check out George Soros portfolio and bingo! he owns the same stock!! I decide to lower my stop again and risk 3% (Triple my initial risk).
By the end of the closing day my stop loss triggered and as a result of over-confidence I successfully managed to triple of my loss and have to deal with all the negative emotions for the next week or two.
So what happened here? Although i selected and assessed my trade through technical analysis, I managed the trade emotionally and through outside forces such as peers/news/traders i dont know all of which are considered noise.
Moral: Dont get under the illusion that more information=accuracy. You will never have all info, and even if you did, you will never analyze it correctly and even if you did interpret it correctly, you will never know the market reaction!