View Full Version : The Overconfidence game

05-12-2006, 09:20 PM
I received this article from a newsletter that I subscribe too. I really enjoyed it, and thought that would probably help and assist some of the members here at Bettorschat. Enjoy.

The Overconfidence Game

Your portfolio is full of fantastic stocks, and you're on a winning streak. Dollar signs are dancing in your eyes - but maybe you should stop while you're ahead.
Behavioral economists will tell you that overconfidence is the undoing of a winning trader. After a series of successful trades, the typical trader will begin to trade more aggressively and more frequently. Before you know it, the winning turns into losing.
Here are a few ways to protect your profits from your self-destructive instincts:
Face the fact that you are not omniscient. You have no idea what the future holds. Stick to your trading plan instead of indulging your ego.
Remember that you are not invincible. Overconfident traders ignore the risks they take and focus only on the profits they imagine to be forthcoming. So pay more attention to risk management. In particular, limit the size of any one of your bets to no more than 5% of the total worth of your portfolio.
Always take some money off the table after a successful series of trades. Put it in a municipal bond or money market account and leave it there. Not only will it prevent you from giving back all of your profits to Mr. Market, you'll also tend to trade as if you were starting from scratch yet again and, as a result, exercise better trading discipline.