This week, the deputy governor of the Bank of England had to step down. Charlotte Hogg had failed to disclose a conflict of interest. It’s likely that this was a careless oversight, but the main criticism of Ms Hogg is that it was this kind of casual carelessness that comes with a sense of entitlement.
And if there’s one thing the British public are sick of, it’s being told what to do by those who’ve been born into the ‘entitled’ elite.
A sense of entitlement can be a very powerful thing. It’s what enables trust-fund children to walk into high-level job interviews with no doubts that they’ll be able to handle the roll. While the less-entitled of us are often crippled with doubts about whether we’re really up to the task.
For a long time, I naïvely believed that those people who ran the country and big financial institutions were somehow smarter and more capable than the rest of us … but I see now that they’re just like you and me, except for their gargantuan levels of self-confidence.
This kind of confidence is great if you want to convince others (or yourself) of your value … but how useful is it when it comes to trading the markets? The markets don’t give a damn if your dad has a knighthood … or a moat … or a duck house …
While getting a job in a big hedge fund might be easier if your uncle is on the board … ‘privilege’ doesn’t help at all when you’re face to face with trading decisions. In fact, it can have a disastrous effect on your profitability.
The worst trading mistake: check your privilege
Let’s take a look at where traders have gone very badly wrong … I’m talking about Nick Leeson, the London Whale, Kweku Adoboli, Jerome Kerviel …
Yes, these people made a string of errors which led to them being seriously over-leveraged, but there was one fundamental problem behind their behavior …
They believed they would win.
And it’s this kind of confidence that’s the most dangerous thing of all to the trader.
If you genuinely believe that your trade is going to win, then why wouldn’t you over-leverage yourself? If you’re confident that you’re right, then you’ve everything to win and nothing to lose by betting your lot on the outcome!
Just about any trading mistake can be traced back to overconfidence. If you enter a trade with a belief that you’re going to win that trade, you’re in very dangerous territory. The market owes you nothing – it doesn’t give a damn about your carefully formulated trading strategy, your back testing, your great knowledge of technical indicators …
The only way to enter a trade is like you’re going to lose.
How being a loser is the only way to win
It’s the paradox of trading – we need to trust that our strategy will win in the long term, while also entering every individual trade we place with the belief that it will lose. By acting like every trade will lose, we will manage our risk correctly, and also have the attitude needed to quickly cut losses when necessary.
We must be confident in our abilities, but deeply pessimistic that the markets are going to try their very best to chew us up and spit us out.
It’s a tough act to balance.
Most people tend to overestimate their skills – most of us, for example, believe that we’re above-average drivers.
Give yourself a seven?
If you’re asked to judge your own skills, be it driving, work performance, charitable behavior, getting on with other people … most people rate themselves about seven out of ten.
Of course, it’s logically impossible for all of us to be above average, but it’s this superiority bias that we’re up against in our trading. It’s the voice in our ear that tells us others haven’t spotted this great opportunity … we’re smarter than most … we’re ahead of the curve … we have the edge …
This bias shouldn’t be underestimated. A research study back in 2007 studied 215 online broker investors and found that inexperienced investors had no idea of what their performance was – often believing that they’d made good gains, when in fact, they’d lost money.
As someone with an obsession with tracking my performance, the idea that you wouldn’t know how much money you’ve made or lost with a strategy horrifies me. But – it turns out – the majority of novice traders fall into this category.
Characteristics I notice again and again with successful traders is that:
- they don’t hide from their losses – they are recorded in black and white
- they don’t get carried away with their successes (because they know that a drawdown is always around the corner)
- they are always focused on their shortcomings, looking for ways to improve performance.
And the only way to do this is to track your performance diligently. If you’re not already using it, the Trader’s Bulletin journal can be downloaded HERE, or if you’re a Heikin Ashi Mountain member, there’s a journal that’s specially formulated for the strategy on the members’ area HERE (this is for Heikin Ashi members only, so you’ll need your password to view it).
But if you prefer to be a less-successful trader, deluded that you’re making money and that the markets owe you a living … the trick is simple – not keeping any record of your trades is the best way to keep up the charade!