Trading Psychology

What to do if you are a victim of your self-esteem?

In our next article dedicated to psychology in trading, we will look at two psychological phenomena affecting the perception of forex traders' abilities. Do you know how the Dunning-Kruger effect and impostor syndrome affect your trading?

Self-esteem problems are among the factors that have a very big impact on the results of traders. Whether it is overconfidence or lack of confidence in your own abilities, in both cases it can lead to unnecessary mistakes and losses.

Dunning-Kruger effect

The Dunning-Kruger effect is named after psychologists David Dunning and Justin Kruger and refers to a cognitive bias in which people with low knowledge and skills overestimate their capabilities and abilities. Although their actual performance is low in line with their knowledge and ability, they tend to overestimate their own performance compared to others. People with above-average knowledge and abilities then tend to underestimate their abilities.

In trading, this behaviour is manifested by less experienced traders who feel that their knowledge is sufficient to be successful. The problem is that in reality their knowledge is insufficient, they do not understand the movements in the markets and they do not understand the complexities and basic principles of the markets.

However, even this does not prevent them from attributing all their trades that end up in profit to their skills and abilities, even though in most cases it is just coincidence, luck or simply a combination of favourable market conditions. At the same time, they place excessive emphasis on such trades, so that they have little chance of realising that their profits are not the result of their skill.

Excessive risk and overtrading

This false sense of superiority or certainty then leads such traders to tend to underestimate risks in the markets they do not actually understand or are unaware of. A major malady that such traders' overconfidence manifests itself in the markets is overtrading, which never leads to consistent profitability in the long run.

In addition, traders tend to have a confirmation bias, where they seek out information that confirms their beliefs and fail to perceive the opposite view or ignore warning signs in the markets. Sometimes the community of fellow traders, for example, can be a problem for such traders. They praise the trader for the mentioned accidental successes, instead of warning him about too risky behaviour leading to such excessive profits.

Impostor syndrome

The other extreme is the so-called impostor syndrome. In this case, it may not be an inexperienced trader at all. This syndrome can occur in successful people with sufficient knowledge, but the problem is that such a trader tends to doubt his abilities and skills. This in turn gives rise to the fear that one will be exposed as a fraud because one's successes are the result of mere chance, luck or favourable market conditions.

A trader who suffers from impostor syndrome then constantly questions his decisions, even if he has a workable strategy, and feels the stress of a possible mistake with every trade. He is afraid of failure, tries to execute only perfect trades at all costs, constantly compares himself to other traders whom he considers more successful and focuses on his shortcomings. All of these feelings can then be exacerbated by a possible series of losing trades, leading to a sense of failure.

This constant stress when opening trades can then lead to unnecessary hesitation, which in the worst case can lead to paralysis, when the trader is unable to open any trade. Consequently, he then keeps trying new approaches and strategies because he feels that his strategy is not sophisticated enough and does not work. This in turn leads to the trader trying unnecessarily many approaches and trying to prove his skills to others at any cost, but the result is only exhaustion and burnout.

How to avoid it?

In both cases, one of the most important steps to solving the problem is the need for self-reflection, i.e. admitting the problem and doing something about it. It's important to keep a trading journal because data can give you much more objective feedback than self-assessment. On the one hand, if you approach your results with enough humility, you may find that it's probably not as good as you thought, or on the other hand, it may be better than you expected. If you are unable to do something like this, feedback from someone more experienced in your environment or possibly the help of a mentor can help.

It is never too late to learn and the path of a trader is one of continuous learning and improving one's skills. If you feel that you are better than everyone else because you have all the information in your pinky, you will never get anywhere. And even if you are one of the smarter and more successful ones, it doesn't mean you know and can do everything. Trading is a complex business, and there is always more to learn. As one of our traders recently wrote to us, "success in trading is a journey, not a destination".

Self-reflection and education will help you identify your weaknesses and strengths. This will then help you in finding a healthy self-confidence, where you will be able to objectively appreciate even the smallest successes and in return learn from your mistakes. Consequently, you will then be able to set clear and realistic goals that will not be stressful for you to achieve and will ensure that you gradually improve at what you do. And if in the end none of this helps, you can turn to a performance coach, who can help you identify your problems and can also help you solve them. Trade safe!

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