Confidence vs Ego in Trading: Where is the Line? // Ep. 70

In This Episode

• When to let go of your ego
• When to embrace our ego
• Why not only traders fail

Does it Help to Have a Strong Ego?

Some traders think that getting rid of their ego is the key to being a successful trader. That might be useful in some cases.

But a strong ego can also be beneficial in helping traders develop a strong sense of identity and not get sucked into other people's opinions.

We talk about how to walk that line and figure out what's best for you.

Read the Transcript:

Hugh:    Hi, Walter. This might be kind of a weird one for most people. But I got to thinking about a person's sense of identity and how that relates to trading. So do you think that a strong sense of personal identity makes a better trader?

Walter:    It depends, like most things in life. I would say a lot of times, you will see these gurus and they are like really strong personalities. Especially if they come from an institutional background. A lot of the guys that were on the floor, they're physically imposing people.

They are used to being kind of dominating and on the floor that was important because you wouldn't be heard. You wouldn't get your orders filled if you didn't catch someone's attention. Also just when you trade a lot of money, there's a lot of ego involved.

There was a guy actually right around the corner from me. He had a big, huge fund and I don't know if you heard about it. But there was somebody in January of 2020 that was putting in a lot of orders. A lot of short orders, he went long. Sorry. He went short the CAD/JPY like short the indices and stuff like that. Like putting on huge orders.

A lot of options and stuff assuming that the market was going to tank. This was in January 2020 and people were like, who is it? There’s a lot of noise like, who's putting in this mystery trade or whatever. It turns out it was my neighbor. Not my neighbor but you know he's around the block.

He's literally like a block away and a much nicer house. Anyway, he and his wife both run hedge funds. He bought a bunch of mask companies too. He did all this in January 2020 assuming that we're going to have a big crash from the virus.

I found that fascinating that he was like, he basically went all in you know with his fund. It cashed out and he made like two thousand, four hundred percent or something like that. It was extraordinary because obviously the market did fall in February and March in 2020.

After all the news came out and the markets finally kind of panicked. So you know that kind of thing and George Soros is famous for that. Taking these really strong positions against.

So when you do that, that's an ego-feed. Do you know what I mean? That can really mess with you. What that means is later on you might get to a position where you are just completely convinced that that's the right side. Maybe you are not on the right side and maybe you go full bore like um Soros and Andrew Barry.

I think that's his name. The guy from the big short and my neighbor-guy. I think that can be a problem when the ego gets involved. I am not saying that those people have that. I am just saying that that's definitely a potential. It is definitely a potential for that when you have these big, huge wins. It's like the old adage.

They say, “The worst thing that ever happened to me when I was a trader is the first trade I took” or, the first week or the first month or whatever. “The first time or period I made a bunch of money”. That was the worst thing that could have happened to me because then I think it's easy. I think I know what I'm doing and it was all downhill from there. You hear stories about traders where that sort of thing happened.

It kind of happened to me. It wasn't really me. It was my friend who tripled our account the first night or the second night that we were trading but then we lost it by Friday, by the end of the week. You know that kind of thing is true.

The other thing that I think you might be getting at so there's that ego part of it. But there's also a sense of confidence that's needed. You can be overconfident and you can really go for it because you think you know what's going on and other people don't. You're the mind that understands the markets and all that stuff especially if you're into fundamentals.

Fundamentals get really into that. People that are into fundamentals I think can get really into that but the other side of it is having the confidence that you need as a trader. To pull out of those terrible draw downs and that to me is a discretionary systematic trader, that's a real big deal because that's when you are at your weakest.

So you and I both know that when we are  in draw downs, that's when you are at your weakest, that's when you are most susceptible to making the big mistake. The big mistake could be doubling down. You know, taking a big huge position to make back those last seven losers. It could be changing your strategy and modifying it and saying, “Oh, if I had done this instead I would have avoided all those losers”. Or, it could be that you know thinking that the markets have changed.

All these algorithms and robotic traders and institutions have changed the market so my system doesn't work anymore. All of those things that creep up in the moment of doubt, you need to be able to have the ability to squash those. It's true that those things could be true but in most cases it's not.

In most cases it's just the demons that are creeping up and scaring you. That's how I see it. So I think you do need that confidence. You do need that ability to rebound from poor periods of trading. But, you don't want to swing so far that you think you are like Mr. Market and you know exactly where you know things are going to go.

So that's my take on it. Resilience and confidence is really important. So that aspect of your personality is key but also you know being open to new ideas is good too. Being open to like for example, if you just trade trend following strategies and you never take reversion to the mean strategies, that's a missed opportunity to diversify.

So being open to new ideas and stuff like that and building strategies that are complementary, that can also be like a personality fault too. So those are the sorts of things I think about when I'm thinking of that. What about you?

Hugh:      I was talking more about having the confidence to come back. I think if we look at the success rate of traders you know it’s a lot of places say, like ninety of them fail. I think that's really indicative of  how people think in the general public. You see a lot of people following whatever is on the news.

They are following this guru or they like to follow this guy or whatever. They don't really develop that sense of their own personality. I think that's really important to have the confidence to go forward in trading. Especially when most people don't know anything about trading.

So that's kind of more what I was getting at but you have a good point there. You can really get overboard and you can start to think you are the man and you are going to just, you know, make all this money.

Hugh:    Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.

At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.

So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.

Walter:    You will see it with these guys that are veterans. Especially in the institutional world. The reason why I say this is because I hear people talk about it. They go to like trader groups because they have these trader groups in Australia. It is called the Australian Technical Analysis Association, ATAA.

So they'll have these talks and I've done a few of them or whatever. People will come to me that have gone to the talks and they're like, “Dude, that guy's crazy. He's got so much ego and stuff” and they tell me. Do you know what I mean?

Hugh:     Yeah.

Walter:    Now, I think what happened in some of these chapters, not all of them. The Melbourne one's really good and stuff but some of these chapters, what happens is they have like — I don't even know if they meet anymore — but when they did, they had free drinks. So people would go there and a lot of alcoholic traders would show up because of the free drinks. It totally went downhill from there.

So you'll hear things about, “Oh, yeah so-and-so came” like a famous trader and they'll be like, “Dude, that guy's so much ego.” Stuff like that so it's interesting. It really is interesting.

I think what you were saying about the eighty-five percent or ninety percent of traders that fail, what's interesting about that is like, I think of other markets. People say that about like what you and I do, trading markets but there are other markets that people just assume that everyone makes money.

For example, like real estate. Everyone just assumes that if you get into real estate, it's always going to go up. To me, that's so funny because I look back at my life and what happened with my parents. Every time they sold the house, it was at the bottom. Every time they bought, it was always when they were getting really expensive.

It's like magic. It really is amazing to me and I don't think that's a unique thing. I think there are a lot of people that pile in when there's a frenzy right before the top. A lot of people go, “Oh my gosh! This neighborhood or this city” or whatever, it's done now and they sell literally at the bottom.

I saw that close-up. I mean, looking back now I see what happened. I didn't kind of realize it at the time as a kid you know when we were moving around. Because we moved around quite a bit as a kid. It is interesting to me that like everyone says that the markets are so hard to trade. But then some markets like real estate apparently it's just like you know everyone has the golden touch whatever. I don't know. It's crazy to me.

Hugh:     I saw this story. This news story about houses in East Bay, San Francisco. Berkeley, Oakland and all that and some people are offering like a million dollars over the asking price and that just blew my mind. But, that's a perfect example of like you know people think it's going to go up forever and it probably won't.

Walter:    Yeah, it's so true. We have over here in Australia, we have, it’s interesting. They have off market so you can buy a house that's off market. So I always ask the agents. I am like how is it that they're selling it and it gets sold but it's not on the market.  Does that mean it was on the market and so I guess what it is, it's like, people that are like they're going to sell the house at a certain time.

Over here in Australia everyone wants to sell the house in the spring because in the spring is when everything's nice. Apparently, the prices go up every spring. I don't know that's the theory. You don't want to sell in the winter which as we're recording this, we're going right into winter right now.

So everyone wants to wait until spring time to sell their house. So you have these off-market places that are not for sale. No one knows that they're for sale but if you go to an agent, the agent knows someone and they know the owner or whatever then you could actually buy it. But the thing is you have to pay the price.

Hugh:    The spring price.

Walter:    Spring price, overpriced. The September, October price which is spring over here in Australia. You can't pay the winter price. That's so funny. The whole thing is funny. I just think it's hilarious. It's the way things are.

Hugh:    All right, cool. Thanks, Walter.

Walter:    See you!

Hugh:    All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.

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