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“Hey Joe: Is it better to be an optimist or a pessimist when you are trading?”
That is a very interesting question. It would seem than being somewhat pessimistic would cause a trader to take fewer trades and cautiously manage the trades he/she takes. In contrast it would seem that a more optimistic trader would tend to trade more often, taking greater risk.
However, studies have shown that neither of the above is true. In a recent study, men and women did not differ in their levels of optimism, but optimistic men made more risky trades (forex, futures, options, number of transactions) than pessimistic men, pessimistic women, or optimistic women. In the study, being more optimistic and making more risky trades didn't seem to have any negative consequences.
The final values of the accounts did not differ between men and women, or between optimists and pessimists. Optimistic men, although making riskier trades, performed the same as everyone else. The study was inconclusive.
Is being an optimistic trader a bad thing or a good thing? The verdict is still out. Additional studies are needed. All the same, it's probably not a good idea to be optimistic to the point of putting on trades without carefully managing risk, such as limiting the size of a position or using protective stops. But perhaps a moderate amount of optimism and confidence is useful. One of the results of the study was to point out that pessimists often panic, become fearful, and tenaciously deny they are in a losing trade.
A moderate amount of optimism, in contrast, ensures that even in the midst of a losing trade, an optimist may be more likely to seek out information and make an informed decision. So, in the final analysis, it is a little like walking a tightrope between extreme unrealistic optimism and extreme debilitating pessimism. Finding the right balance is the key to trading consistently and profitably.
About the Author
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Joe Ross, trader, author, trading educator is one of the most eclectic traders in the business. His 48+ years include position trading of shares, and futures. He daytrades stock indices, currencies, and forex. He trades futures spreads and options on futures, and has written books about it all - 12 to be exact. Joe is the discoverer of The Law of Charts™, and is famous for the Ross hook™ and the Traders Trick Entry™.
His website: http://www.tradingeducators.com |
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