If the realities of trading were accurately presented far fewer people would attempt to trade. I mean, who wants to actually have to work at something to gain proficiency? If that were the case we’d all be content being engineers, doctors, teachers, mechanics, lawyers, business owners, etc., etc. So please, don’t let the word get out about the reality of the difficulty of trading because the jobs of thousands depend on all the get-rich-quick myths surrounding trading. Exchanges, regulators, brokers, banks and my personal favorite “trading educators” would see a huge decline in employment numbers. The reason for this is that the interest of the “experts” associated with trading and the interests of the actual traders stand in opposition. Here is an example: High Frequency Trading. I haven’t decided whether or not I think HFT is actually harmful to the markets and whether or not its potential benefits (added liquidity) outweigh its potential damage to the structure of the market. I do know that it has made the favorite timeframe of most retail traders even more difficult than it already was, which was close to impossible. It is also a cash cow for the exchanges and some very large institutions.
I ran across an article that referenced a form of cognitive bias, the Dunning Kruger effect. I don’t know of anyone, certainly including myself that has not fallen into this common psychological trap. Here is the Wikipedia description:
The Dunning–Kruger effect is a cognitive bias manifesting in unskilled individuals suffering from illusory superiority, mistakenly rating their ability much higher than is accurate. This bias is attributed to a metacognitive inability of the unskilled to recognize their ineptitude. Conversely, people with true ability tend to underestimate their relative competence based on the erroneous or exaggerated claims made by unskilled people.
Add to this the reality of the really, really bad, conflicted information about trading from within the trading industry itself and the picture of how and why such a large percentage of those who attempt to trade who attempt to trade begins to come into focus. Most of the experts are clueless or have a conflicting agenda. Those just getting into trading quite naturally and responsibly seek out “experts” to get advice and education. Most of the experts have an agenda other than the success of their clients. Then the psychological pitfalls including confirmation bias in its many forms compound the problem. The way trading is presented by the trading industry on top of our natural psychological tendencies such as the Dunning Kruger effect is quite insidious. Here is a quote from David Dunning, one of the two researchers at the Cornell University Department of Psychology who posited and tested this theory:
If you’re incompetent, you can’t know you’re incompetent. […] the skills you need to produce a right answer are exactly the skills you need to recognize what a right answer is.
So, how does one avoid this trap? How can you know what you know and what you don’t know? Mark Twain warns:
It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
– Mark Twain
Keep records. It is actually quite simple to figure out if you have a probable chance of consistent profitability. If you lose money over a series of 30 trades or more it is unlikely you have an edge and it is very likely that if you are trading real money you will quickly lose all of it. Be willing to question your methods, timeframes and all the present information on which you rely to make trading decisions. If it is not working discard it.
This advice applies to what I teach just as much as to anything else. It is why the success of my clients is the paramount focus of my business.