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Warrior Trading Blog

Trading Risk of an Overconfident Trader

Trading Risk

What’s up you guys. All right, so I’m wanting to do a little video here, talking about overconfidence. I’m on three red days right now. I’ve dug myself a little bit of a hole.

I’ve got another episode that I’m going to do specifically on digging myself out of a hole and kind of my approach on how to get back on the horse after losing 20 grand or whatever the case may be for you.

But I want to talk a little bit about the over-confidence because I think that it’s a big contributing factor in digging these holes that I often find myself in. So each day when I come in to trade, I have a general goal of making money, right?

That’s what we do this for. We don’t do this just… I mean some people may find it… I mean it is entertaining but really the goal is obviously to make money.

So each morning when I come in, my routine is pretty much the same. I start the day looking at my scanners to see which stocks are already up pre-market and which ones I think have the potential to continue moving up.

And I find that I am very… I’m such an optimist when it comes to the market. I always look at things and I’m like, “I see the potential,” and it’s great to see the potential in people, in cars, in fixer upper houses.

But sometimes in stocks, seeing the potential is being a little bit biased and not really seeing the reality, which sometimes is that the stock is not very strong really, or it doesn’t really have a good chance at doing what in an optimistic, kind of perfect world it might do. And yet I often trade with this kind of lens of optimism and overconfidence.

Trading Risk Example

For instance, today I took a trade on a stock and the stock was… It had broken through the V-wap and it was squeezing up. So it was moving up quickly. And I looked at it as it was breaking, I think it was 675 and I was thinking, “If this thing breaks 675, next spot, 680, 85, $97, rip up to 710, high a day, squeeze through 750.” That’s kind of what I was thinking in my mind.

And so as it starts to squeeze up, as it starts to open up, I went ahead and jumped in at 75, it taps 80 and then drops all the way back down to six and becomes a really big false breakout. And as I was looking at it, even just a few minutes later, I was like, “Man, why, why did you take that trade? You know, that was… Why were you so confident that that was going to work?”

And I really concluded that I was being overconfident on that setup, that even though that trade, that set up does work sometimes on this particular instance, and at that time of the day, and on this particular day, all of the sort of indicators were that it would fail. The market has not been particularly strong today. I’m red on I think four out of the six stocks I traded, we’ve seen more halts going down than going up, and yet here I am being optimistic, that this one’s going to buck that trend and just squeeze up.

Now I think the challenge is that on the one hand, being overconfident and sometimes overly optimistic can pay off really well and in a hot market on the right day, that same exact setup could work terrifically well and end up being a really big winner. So it’s not like it’s good to not be overconfident ever or to not be optimistic ever.

And on the other extreme, to be really fearful and pessimistic to assume that everything is going to fail. I’m not sure… And I’m not… I don’t mean this long versus short, because you can be optimistic to the long side or the short side, you can be optimistic to the short side or the long side.

You can be both ways on it. I really mean more optimistic or pessimistic that the position that you’re going to take, whether it’s long or short, that it’ll work. And so if you’re really pessimistic and fearful, and I’ve met traders who are like this, you don’t end up taking a lot of trades, because you sit on the sidelines and you’re afraid that it’s not going to work or, “Oh man, I don’t want to take the risk. I don’t want to lose the money. It’s probably going to fail.” And then inevitably you do end up missing out on some really great opportunities because you were too conservative.

So ultimately, success as a trader is finding some middle ground in there. But I think a lot of traders come into the market on the over-confident side of the spectrum. I know that I’m that way and that it’s reflecting in the very fact that out of 250 trading days or whatever there are in the year. I come in almost every single day, and every single day I find something to trade.

I’m optimistic enough on almost every single day that I find something to trade. And there’s not eight quality setups every single day. I mean there are on a lot of days, but not every single day.

And yet I am optimistic and I jump in there. Now the kind of settings of my strategy and sort of the way I’m wired to be optimistic and at times overconfident, how does it sort of tie back in terms of my actual performance as a trader? And this is what’s kind of interesting is that for me, being an overconfident and optimistic trader has made me profitable. I mean, I do well.

And yet, when you look at my metrics, what you’ll see is that my average losers are actually a little bigger than my average winners. And it’s because sometimes, and it doesn’t have to happen very many times for it to really screw up your averages. Sometimes being overconfident and optimistic about a stock is completely the wrong move.

And it ends up that I’m getting into a stock at a much higher price than I should. Overconfident, with way too much share size, and then in one trade, I can lose $10,000 or $20,000. I mean, I could take…. At times have very big losses.

Now my accuracy just for the last month was about 71%, which is really solid, very happy be with that. Finished with $66,000 in profit. But my average losers, they were only about $600 versus $900 average winners.

But by the end of the month, the average losers had doubled to $1,100 and the average winners were just under 900. So my average losers doubled because in the last three days I had two $6,000 losses and one $9,000 loss.

Just like that, my metrics for the entire month are screwed up because of those three days of being both overconfident and I’m way too optimistic about setups that were overextended, and I think the problem there with the overconfidence is that when you’re overconfident, you’re not, at least for me, I’m not thinking about risk in the right ways. I mean, it’s like anything else.

But it’s kind of the other side of being overconfident that you might not initially think of is risk taking.

If you’re a person walking on the edge of a cliff, like the Grand Canyon or something like that and you’re really confident and maybe, over confident, you’re like, “Oh this is fine. Like I’m going to be totally okay.”

You could obviously end up taking a risk that’s really not worth taking it and then falling, right? I mean that would be terrible, but that overconfidence could lead to falling. Sometimes you see people taking selfies at the edge of mountains and you’re like, “Oh my God, what are they thinking?” Overconfidence, I’m fine, I’ll be fine. And then inadvertent, perhaps risk-taking, because the thing with the risk taking is that whenever I have the 15 or $20,000 red days, those were never the result of me saying, “You know what? Today I feel like I can afford to take $20,000 of risk.”

No, I don’t come in saying, “Today’s a day where I’d be okay if I lose 20 grand.” What happens is I’m overconfident and I end up taking a trade with way too much share size? I don’t come in saying, “I’m willing to risk this much.” I get overconfident and then I just… All of a sudden I’m like, “Oh my God, now, now I’ve got to clean up the mess.” Sometimes a beginner driver can be overconfident, right? Maybe a 15 year old trying to make a YouTube video and drive.

Maybe that’s a little overconfident for someone with their learner’s permit. Good thing that YouTube wasn’t around when I was 15 years old. At least I don’t think it was, I don’t know when YouTube was invented. But so back to the sort of topic here.

The thing that I kind of struggle with at times is on days like today, I feel really defeated. Because I feel like, “Man, you know what? Well, what the heck? You know what’s wrong? What’s the matter with you? You mean, you’re saying your down, you’re red on the day.” It feels like just such a deflating feeling. It feels like it’s… Because when I step back I’m like, “Man, I was so overconfident.

I took way too much risk and now I’ve got this hole that I’m going to have to dig myself out of. And it makes me question my strategy a little bit. It makes me kind of ask myself. It makes me feel like I can’t completely trust myself when I trade because occasionally I get myself into these higher risk positions at the same time.

On the days where I’m up 20, 25,000, which so far has been my best day in the last two months, $25,000 in the green. I don’t really sit there questioning my strategy. I’m like, “Nice work. That’s awesome.” $25,000 in one day. You get a pat on the back. Even if I was over confident, even if I was super aggressive, the reward is that you’re green and really green. So it’s only really on the red days that, that I end up kind of questioned the strategy.

But of course I would say that you really need in a lot of ways to be able to, to be OK with the kind of worst case scenario. Sometimes financial advisors will say things like, “My clients never call me when they’ve made money.

They call me, you know, when they’ve had a really bad month, when the market’s down, you know, 10%.” So if the market dropped 10% and you were 100% invested in the market and your life savings or your 401k retirement account dropped by 10% would you be able to handle that or would you be panicking?

Because if you’d be panicking, then you probably shouldn’t be fully invested in the market. You should be diversified down into bonds and stuff like that. So when the market drops 10% at least you’ve got… Your beta’s not a one-to-one.

So similar I suppose with trading is that if you can’t handle a day where you could potentially lose 15 or $20,000, then you probably shouldn’t be trading with 10,000 share positions and you probably shouldn’t be trading super low flow momentum stocks that are spiking up 100, 200, 300% in one day. So you have to kind of adopt a strategy that fits within your risk tolerance.

I mean ultimately that… It really is true.

And I think that for me, the strategy that I have, it obviously, it pays really well. Would I like in a perfect world, to be able to make the same amount of money but just be averaging 2000 a day, instead of having three $10,000 days, three red $7,500 days, and then you have three more red, $10,000 days or green $10,000 days? Sure. But I haven’t found the ability to have a strategy or to trade in a way that is kind of that consistent.

And maybe that’s a flaw in my strategy. And maybe it’s something to strive for, finding more balance, but those big green days don’t come without taking risks. And if I didn’t take those risks, then I wouldn’t have the big green days.

Of course the red days would taper as well, but then at the end of the day, where would I be? Would I make less money? And I think that I would. And I’ll tell you that as an example of this, I had a 56 consecutive day green streak from, I want to say 2016 into 2017, I think that’s when it was. It was a while ago.

But during that green streak, I didn’t actually make a lot of money because I was so fixated on being consistent and being green, that if I was up even just… That’s kind of a pretty little farm scene here.

If I was up even just $150 on the day, I would say, “No, that’s it. I’m throwing in the towel, I’m done. I don’t want to push my luck.” And so I was becoming so risk adverse that I really wasn’t trading enough. Whereas when I’m not fixated and worried about having a red day or whatever, a green streak, consecutive green day type of thing, I trade much more… I trade much better. I’m more aggressive when the time is right. I’m not afraid of loss. I’m just really focused on being aggressive. So it’s just kind of interesting.

And again, this is just an episode that I wanted to make for you guys sharing my thoughts. There’s no right or wrong answer. It’s really what’s what feels right for you. And the ups are great. It’s that quote from that Johnny Depp movie. “When you’re up, you never feel like you’re going to be down. And when you’re down you never feel like you’re going to be up again.” And trading is like that, a lot. It’s just the way it sometimes seems to be.

But the ups are certainly great and the downs, they’re not fun. But as long as you’re able to mitigate them and you make more than you’ll lose on average, and you’re net profitable and you’re doing something most people can’t do, and you should be proud of yourself for that. We can always strive to be better, but if you’re green, you’re doing really well, so that’s the first goal.

Get green, and then try to get a little more green. All right, that’s it for me. I hope this has been interesting for you guys. I will see you for our next recap and stay tuned for the special episode on how to dig yourself out of a $25,000 hole.

Want to learn more little more about trading? Check out some of the links in my description, and if you have questions, ask them in the comments. I personally respond to every question posted on my channel and don’t forget to subscribe.



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