Trading Tips

Optimism in trading is good, to a point

Jess at Rogue Traderette recently posted on the subject of optimism as a key requirement of traders for long-term success. I tried leaving a comment, but it was either lost in the system or deleted, so I figured I would post my thoughts here.

First, I generally agree with Jess that a certain sense of optimism is required in trading. Perhaps resilience is a better choice of words, but the idea is the same. The market is going to throw a lot of negativity at you and you need to not let it do any lasting damage.

That said, I have two counter-points.

First, we humans have a tendency to attribute things that go positively for us to the validity of our own decision making, or skill, ability, etc. even though it might just be random dumb luck. Similarly, we like to place blame for when things don’t go our way on external factors (brokers, market manipulation, regulators, etc.). We have plenty of anecdotal evidence for this in trading forums and elsewhere, and these are documented biases in the psychology research literature.

Second, being optimistic can mean not doing a very good job in terms of risk management. By that I mean those inclined to think happy thoughts can very easily under-weight the negatives in their market analysis, trading plan development, etc. That leads to taking positions which are too large, putting on trades which should be avoided, and other things which can cause considerable harm. When deal with risk, it makes a lot of sense to think first about the prospect for loss.

New traders are very subject to these issues. After a few slaps of reality in the form of losses, though, most folks who stick around long enough get things sorted out.

By John

Author of The Essentials of Trading

2 replies on “Optimism in trading is good, to a point”

Hi John – your comment must’ve gotten lost, as I only found this ping-back when looking through my spam folder 🙂
I agree with what you’ve written. I’m an optimistic person, and my start in the market was very much influenced by my rose-coloured glasses – ie, a massive loss because I was totally unprepared for anything to go wrong. So it does have its dark side, too.

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