Learning How Your Optimism Can Make or Break Your Trading Results
If humans weren’t optimistic, they wouldn’t develop, which is all through optimism. Only by holding a healthy dose of self-assurance and a positive outlook can one expect to make it through life with all of its unknowns, worries, and misgivings and emerge victorious.
However, at times, it may give you excessive self-assurance to the point that starts making mistakes, where you usually easily excel. Especially where trading is concerned.
Everyone has heard the cliche that explains how certain people always seem to have a rosy view of the world, even when things are less than ideal. Being called “too naive” is a common slur that suggests a person has an unrealistically optimistic outlook on life. Due to this, they frequently behave recklessly.
Nowadays, this scenario can also boil down to the market investor. When the market is performing nicely, and investors see an ROI, they tend to become unreasonable in their approach. Certain of their superior market understanding and expertise, they dismiss the possibility of things going wrong from there on.
However, investors should be wary of the optimism and overconfidence bias that frequently results in disastrously significant trade breakdowns. One should adopt an optimistic outlook as it is often helpful in everyday situations. In fact, it is obvious that people who witness the bright side of things tend to have better health and more pleasure.
Yet many trading professionals advise not just a sufficient dosage of cynicism but an excess of it, especially when dealing with financial markets; otherwise, you may fall into a terrible investment again.
It doesn’t take much of a stretch of the imagination, to comprehend why behaving in this manner may be so deadly to your trading account. Investors who are sure unpleasant things will never transpire will cease protecting their wealth.
Optimistically biased investors often tend to have a skewed market perception; this implies that their existing material and psychological circumstances cloud their view of the markets.
Logic dictates that savvy investors act objectively in response to market conditions. Yet investors’ capacity to do so is hampered by unconscious bias. Consider that such investors are predisposed to be optimistic. Outside factors, typically have little impact on them.
In actuality, they have a gut instinct and the optimistic predictions just confirm their suspicions. Investors with this mindset are said to overlook evidence that runs counter to their preconceived notions.
What kind of influence does having an optimistic outlook have on investment choices?
Investors’ mind has a natural tendency toward optimism which is hardwired into it. They are into “the impression of infallibility,” “unrealistic optimism” and “ego”.
As a result of this bias, investors tend to overestimate the chances of avoiding failure and underestimate their probability of experiencing accomplishment. Whenever this occurs, investors are more likely to take riskier trades.
An example of this is an investor who puts most of their savings and investments into a firm’s shares; because some folks, once acknowledged and develop a false sense of optimism about the future of the business.
As a result, they consider these businesses to be safer from catastrophic failure. An individual’s tendency to be overconfident is tied to their tendency to be too optimistic. If you’re an investor, you’ll feel like you’ve uncovered some secret information.
They credit this realisation with giving them the confidence to think that compared to other investors, they have a greater chance of success.
Another hallmark falsehood of optimism bias is unliking toward denial.
Those who suffer from this prejudice frequently falsely assume they are succeeding in the marketplace. Even though it’s not factual, this misconception is nevertheless widely held. Recent research has shown that those more optimistic are likely to be in denial and suffer lower returns than the market.
Optimism bias is associated with a lower savings rate than other trader personality types. Because of their risk-taking tendencies, those with this predisposition tend to invest in forex markets with significant volatility. It’s been shown that individuals with this prejudice also tend to be the sort that regularly spends more money than they have coming in.
What Can Be Done to Counteract the Optimism Bias?
Unfortunately, irrational thinking may take the form of optimism bias. As a result, avoiding it entails nothing more than keeping an eye out for it. Because of the correlation between a positive outlook and success, it’s no surprise that optimists predominate among the prosperous; which rings true regarding trading.
Of all the self-assured people you’ve encountered, how many have a permanently pessimistic view or disposition? I’d wager that the actual number is vanishingly tiny if not zero. If you’re in the midst of a significant drop, somewhat of making excuses for yourself, reclining in the dark, and chewing your nails, focus on the fact that you’ve been able to stick to your trading strategy thus far.
Investors must rely on something other than a prediction they came up with. Instead, it has to be gleaned from the historical performance of a group of assets analogous in nature and time horizon. It’s well-established as more reliable when making judgments about external factors.
Accordingly, individuals should only put some of their eggs in one basket. It would be better to stick to good investments, which provide more conservative returns and allow compounding to work its magic.
Finally, by putting all your energy into ensuring that you’re as well-prepared as possible, you’re teaching yourself to accept that losing trades are inevitable. As a result, you’ll feel less pressure to avoid taking trades with a strong chance of failure and will be more likely, to act on legitimate trade setups and sound judgment.
In conclusion, investors should avoid succumbing to optimism bias since it might have an unfavorable impact on their holdings.