A somewhat recent report from Citi showed that 84% of global Forex traders believe they can make positive monthly returns.
However, according to the same report, only 30% of retail Forex traders achieve those positive monthly returns.
Now, let’s think about this.
We are not talking about breaking the bank. We are talking about making anything more than 0 after a month of trading.
How can so many smart individuals be so blatantly wrong?
What separates belief from reality?
My best guess: Overconfidence.
Wait, you’re telling me that traders are just a “bunch” of narcissistic, arrogant people?
No. Overconfidence is a cognitive bias which has been studied by decision scientists and psychologists for some time now.
Overconfidence is believing you know more than you do.
Everyone is affected by overconfidence, even renowned experts have shown this bias and made erroneous decisions (in the fields they were experts in, no less).
The same occurred in a study of Harvard trained managers making erroneous judgments in their fields of expertise due to this bias.
You know what is going on in the markets and you trust your strategy, system, and indicators. But how much do you know, really?
Any way you slice it, currency markets are too complex. And the price of overconfidence is too steep, as 70% of Forex traders can attest.
If you are one of the “technical analysis-only” traders, you are twice as guilty of overconfidence.
Having blind faith in a one-dimensional approach to make money consistently in the markets is a strong version of tunnel vision.
OK Emil, but how can I, a retail Forex trader, diminish the effects of overconfidence?
The first and most difficult thing to do is accept the limits of your knowledge. Like the famed Greek philosopher Socrates once said:
“I know that I know nothing”
Then, you need to seek the best expertise you have access to.
While experts still show overconfidence, the effects of this bias are significantly reduced the more you know of a topic (according to the same Harvard study).
This explains why major players such as Hedge funds and multinational banks pay thousands of dollars for premium information feeds.
It’s impossible to be an expert in everything, so you reduce the chances of being wrong by asking people who know more than you do in their narrow specialties.
As a retail trader, your best bet is to find the best analysts and pay attention to what they say.