For traders, self-confidence is very important, but a trader's self-confidence often changes with the fluctuation of the account balance, when you lose a lot of money, your confidence will be depressed, and when you make a lot of money, your confidence will burst.

Self-confidence can be said to be the cornerstone of success, as well as in the field of trading. However, what I want to talk to you today is not how to maintain confidence in trading, but how to avoid overconfidence. Because the lack of self-confidence in the transaction may cause you to miss the big market, but overconfidence can cause you to suffer a big loss.

What is overconfidence? To put it more colloquially,People often have a strong confidence in information or in their own judgment, although this confidence may make you fall to pieces overnight, which is overconfidence.

According to Ekaterina Serikova, a trading behavior analyst at Currency.com, overconfidence bias (over-confidence bias) can be seen everywhere in capital markets.Overconfidence in trading is a dangerous thing, which can lead you to make irrational decisions and take high-risk market positions.

The reason for people's overconfidence is often due to cognitive limitations, limited by experience, it is difficult for people to see through the future things there will be several ways of development, or some things are already difficult to speculate their future development trajectory, overconfident people in the above two cases often still believe in their own direction.

According to psychology, traders with this cognitive bias tend to be overconfident about their technology, and they think they must know more than their peers in some way.

This view is also confirmed by a survey of 300 professional fund managers by James Montier, a master of GMO asset allocation. He found that 74% of respondents thought they were above average in terms of investment ability.Overconfident traders are more likely to build too many, too large trading positions and believe that they are better than others.And all of these are precisely the reasons for the failure of the deal.

What are the manifestations of overconfidence?

Overconfident traders tend to do the following:

• Excessive trading

A common sign of overconfidence is excessive trading, including trading too frequently, making large trades, and being willing to take uncalculated risks.

A study by behavioral finance experts Brad Barber and Terry Odean found a direct link between overtrading and overconfidence bias.

And overtrading won't improve your profits. They analyzed the trading accounts of about 66500 households of a large discount broker in the United States between 1991 and 1996. These households have an average annual return of 16.4 per cent and a portfolio turnover of 75 per cent. However, the households with the largest trading volumes returned only 11.4 per cent a year, and the average annual turnover of the portfolio exceeded 250 per cent.

The following figure shows a study of the relationship between trading frequency and investment performance of retail investors.Investors from left to right are trading more frequently and aggressively, and it turns out that the more aggressive investors are, the lower their profits are.

• Self-credit

For overconfident traders, this must happen: if you make a trade today and make money, you will feel good, and the deal is no more than that. When your confidence increases, the next deal will increase your position and aggressiveness. However, if you lose money, you will feel that you are unlucky this time, and it is not your own problem. This is self-credit.In other words, making money is your ability, but losing money is not your problem.

• Control illusion

Another manifestation associated with overconfidence is called the illusion of control, which can also be seen everywhere in the investment world.

The illusion of control refers toPeople often make a mistake about such random events and draw an equal sign between the control of the process and the control of the results.If you feel that you are in control of the process, the better it will be for you.

Let me give you a simple example. Suppose we toss a coin, if heads up, you win; tails up, I win. Do you want to flip the coin or shall I? I think most people will choose to flip this coin themselves. In fact, no matter who throws the coin, the result will not be any better. However, most people tend to choose to vote on their own, which is the illusion of control.

In trading, many people think that if he spends a lot of time and energy to pay attention to market fluctuations, it will have some impact on the trading results, which is overconfidence in ability. Although we all know that the market will not be affected by these individual behaviors, people will still want to pay more attention to the market dynamics when trading.

In fact, paying attention to too much information will affect your judgment. In this era of information explosion, the way to obtain information is more convenient, which requires us to filter out some unnecessary information.

• Corroborate bias

Overconfident traders tend to be preconceived.Be very confident in your own point of view, and tend to collect information that can prove your point of view, while ignoring those that do not support your point of view.

For example, an investor found out that Company An is going to restructure its assets, and the stock is expected to rise sharply in the later period. He will look for people from all sides and various channels to confirm that when he gets the relevant consistent information in the mouth of others, he will be more confident and even convinced of the news. As a result, they will ignore the risks and the information that does not support the answer they want.

How to avoid overconfidence and prejudice？

No trader is perfect, and it's hard not to be swayed by biases, so you need to create a plan that includes strict money management rules. The more you focus on money management, the less likely you are to fall into the misunderstanding caused by overconfidence when trading.

Dario, founder of Bridgewater, the world's largest hedge fund, is a good example of how to maintain moderate self-confidence. There is no doubt that he is at the top of the pyramid in the field of investment. However, he told foreign media that his success was largely due to avoiding the prejudice of overconfidence.

Dario said:

"I know that no matter how confident I am in betting, I can still be wrong. "

With this in mind, Dario will plan in advance for a worse situation and take appropriate measures to reduce the risk of losses.

Here are some ways to overcome overconfidence bias:

1. Seek truth from facts to the market

2. Be honest with your trading skills and abilities

3. Carefully analyze the market pattern by using charts, news and other available materials

4. Listen to different opinions

5. Record your predictions and how you made them, and then compare the predictions with the actual results.

Summary

Overconfidence results from the cognitive bias of traders, most people will have this tendency, it will affect traders in different ways, driving traders to pursue risks, frequent trading and so on. The result is often lower returns.

In the trading market, weakness and ignorance are not obstacles to survival, arrogance is. Only when traders recognize themselves clearly can they not be swayed by cognitive bias and not be slaves to irrational trading.