The Most Important Reason Traders Can't Size Up Their Positions

It's really true:  confidence doesn't come from success alone, but rather from facing failure and moving beyond it.  When you've been tested and tested and tested again, you begin to recognize that the tests are what make you stronger.  They provide the opportunity of learning, not merely the threat of loss.

But many traders fail to look fear in the face.  They chronically undersize positions in an effort to prevent major losses.  When their ideas work out, however, their undersizing also prevents major gains.  Over time, those traders are nagged by the sense that they have skill, learning, and an edge in markets, but are not taking proper advantage of their strengths.

So they come to me and ask for help in risk-taking.  They want to size up positions, but can't bring themselves to do it.  It's too scary to look fear in the face, so they settle on quick glances.

Why is this?  Why are some very talented traders unable to take optimal advantage of their talents?

I recently met with a group of traders and reviewed their journals.  Most of the journal entries were very detailed, suggesting hard work and desire to improve.  The entries went through the trades they put on, how those trades went, and what they could have done better to manage the positions. Sometimes the journal entries also spoke of missed opportunities and positions sized too large or taken in the absence of a clear signal.

My first reaction was that these journals are a waste of time.  They outline problems, but don't contain any detailed plans for correcting those problems.

But I was wrong.  The journals were worse than a waste of time.  They were killing the traders.

Look at it this way:  Suppose I kept a detailed journal of your life and wrote down everything you did wrong, as well as the things you could have done better.  Better yet, imagine approaching a young son or daughter in this manner.  What would be the result?

Damaged self-confidence.

If you keep harping on what you do wrong, why would you internalize a sense of opportunity and achievement?  If all you focus on is what you could have done better, eventually you'll believe that all you can do is fall short.  A good sports coach or military leader knows when to praise and when to criticize: when to build up and when to tear down.  Without the building up, all we do is tear down.

So what happens?  We make money but internalize the sense of "could have done better".  What we don't internalize is confidence.  We're never on the front foot when taking risk because we've programmed ourselves to expect shortcoming.

Take a look at your trading reviews and journals.  Do they inspire?  Do they focus on specific learning and achievement, or are they simply ventings of frustration and things that didn't go as well as possible?  Many, many traders are not working on their trading at all.  They are working on tearing themselves down.

Further Reading:  How To Become A More Confident Trader

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