The Importance of Self-Confidence

Self-confidence is perhaps the most important of all the qualities you will need in order to become a successful trader. You must believe in yourself and your trading plan and have the gumption to not be swayed by the crowd.

Consider the following experiment conducted by psychologist Solomon Asch:

Students were asked to participate in a “vision test.”  In reality, all but one of the participants was working with Asch, and the study was really about how the single unaware student would react to the behavior of the other group members. 

The participants were seated in a classroom where they were told to announce their judgment of the length of several lines drawn on a series of cards.  They were asked which line was longer than the other, which were the same length, etc.  The students working with Asch had been coached to answer incorrectly, to contradict the seemingly obvious evidence.

When the test was repeated with a different unaware subject each time, 33% accepted the group’s incorrect answer against their own best judgment, presumably even when the group said that two lines, different in length by several inches, were exactly the same length.  Control subjects with no exposure to the “wrong” view, had no trouble giving the correct answer.

Yes, human beings can be easily swayed from doing what they know to be the right thing. Novice traders are especially susceptible to this phenomenon. You have to be able to withstand peer pressure in the markets because the crowd is often wrong, and it certainly doesn’t have your best interests at heart. Plan and simple—if you lack self-confidence, it is unlikely you’ll be able to achieve your goal of being a successful trader.

It is not easy to develop self-confidence, especially for a novice trader who has yet to experience success. But, remember that all successful traders were once a novice. And if you asked them, most would probably agree that there are two keys to developing self-confidence: (1) the willingness to persevere through difficult circumstances; and (2) the ability to look at yourself critically 

To persevere means you must have the courage to fight back when you are losing, study data until you have conquered it, and take action when necessary (even if that means making a tough decision). To look at yourself critically means to recognize your strengths and build on them while also recognizing your weaknesses and improve on them, all the while avoiding arrogance or self-pity.  If you are able to do both these things, you’ll be well on your way to developing self-confidence in your trading.