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Confidence: How to Apply the Goldilocks Principle as a Trader


Learn how to control the losers, and the winners will start appearing.

An absolutely crucial characteristic all successful traders share is confidence. Success is only achieved when a trader has the confidence to execute his ideas without being overcome by emotional fears. I believe that creating a game plan and sticking to it will foster confidence in the long run because the trader defines all aspects of his trade that he can control; the rest is left to the market. Confidence based on winning trades is fleeting, but confidence based on the ability to objectively execute ideas leads to long-term, unbreakable confidence.

Yet I often see two primary psychological problems that traders experience with regard to confidence. There is overconfidence and underconfidence, both of which lead to very serious complications in one's trading. Overconfidence occurs when the trader has had a string of winners and feels indestructible. A common statement of reflection once destruction occurs is usually something like: "I thought I knew more than the markets" or "I thought I had trading all figured out." The trader usually begins to get sloppy in their trading and takes poor risk/reward trades, believing it will just work out for them. Hard-earned profits can disappear in a very short time if overconfidence is present -- unless the trader has learned the techniques to recognize this and nip it in the bud quickly.

Underconfidence occurs when the trader either can't pull the trigger or has trouble staying with the trade because he lacks confidence in his analysis and price objectives. These errors result in lost opportunities and money left on the table. Underconfidence is debilitating and must be overcome for a trader to ever become profitable.

Many times when trading errors are present as a pattern, the trader assumes if they can just have confidence, it will solve many trading problems. But,if too much is harmful and too little is harmful, then what is the correct amount of confidence to have in trading? I think many traders believe that if they just have a string of winners, that will give them the confidence they need to forge ahead. Yes, sometimes a winner can give you some confidence to get to the next trade, but what about the other side of the coin? The other side of the coin is a string of losing trades; this will destroy one's confidence. Can a trader's confidence be maintained even in the face of a string of losses?

After many ups and downs with "confidence," I finally believe I have learned that my true confidence comes not with my winning trades but in my ability to control the losers and manage my trades. I noticed a consistent positive attitude that was associated and linked with how I was handling my losses. I started to feel good about how I would take a loss. There was an immediate down emotional feeling if I experienced a larger loss than necessary or exceeded a maximum daily loss. That led me to change the behavior in order to avoid the feeling that I didn't like. Aha! I had control of that! I cannot control the markets, but I can control the parameters of my trades: entries, exits, stops, trading amounts, the number of trading positions, etc.

I was asked recently in our T3Live active trading course by a new trader how I have built my level of confidence. I told the class that my confidence comes from my controlling the losers, not from the winners. Strive for excellence in learning to manage your trades and feel good about the losers as long as you adhere to your game plan. Losses are an inevitable part of trading, and you must accept them and be happy to take them as long as it fits within your defined framework. Knowing that you will never let a loss get out of control and knowing that you will never blow up will create an unshakable confidence and the winners will come.

Editor's note: This story by Evan Lazarus originally appeared on

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