The best traders spend their days basking in the sunlit fields of confidence.

Every one of us battles, often against ourselves, to reach this Utopian plain. These men and women have figured how to get there and, more importantly, stay there. They approach each day with a reverence for the challenge ahead. They keep the memory of their countless failures within eyesight.

Beyond this field is the land of the over-confident. It’s a place of extremes, emotion, and conclusions drawn on inadequate data. The traders here sprint and bound around aimlessly, switching directions, strategies, and goals at will.

If you made it through those mythological metaphors, you’ve got at least 30 seconds of staying power. You’ll need that to build confidence.

Overconfidence is one of the most dangerous things a trader can have.

Gains pile up in your account. The sleepless nights born of blood-red P&L’s fade with time. They are replaced with:

“I’m a different man now. I’ve learned from my mistakes. I’ve got it figured out. Failure is in my rear-view mirror”.

An explosion of brain and psychological research has shown that people weigh recent and outlier experiences more heavily in their thought processes than they rationally should. This leads to conclusions based on the wrong information.

For example, a guy in a bar contemplates approaching a beautiful girl. He’s human, so his memory recalls the last five times he’s approached a woman, as well as that one traumatic experience back in college when the group of sorority girls called him fat and the time he left with the Perfect 10 Model after 20 minutes of small talk.

He’s been approaching women his entire adult life and yet he’s basing his emotional preparation on seven select experiences.

Those experiences may be relevant, but so are the other 100+ times he’s taken the plunge. An objective analysis would take into account every experience and weigh them appropriately. We have to train our brains to do that.

Traders engage in the same behavior. They measure themselves to be as good as their most recent trades and the heavy outliers on their track records. The guy who made a 1000% return six months ago holds that memory as THE defining experience. He approaches each day saying to himself, “I’m the guy who made a 10x return”.

That memory leaks emotional fuel into his decision making processes and encourages him to take on more risk.

And as if millions of traders and successful fund managers haven’t said this before, I’ll say it again: trading is risk management.

Yes, he is that guy. But he’s also the guy that produced an entire spectrum of daily P&L’s. And those days are just as relevant as the big losers and winners.

Over-confidence also comes from the human tendency to over-simplify our world. 

People don’t like complicated. They like black and white. No one has time for complicated these days.

So we reduce situations that are very complicated to black and white potential outcomes, which means we live our emotional lives on the extreme ends of the spectrum and cut out the rest (aka reality). Reduction makes us failures or perfect, winners or a loser, insane or genius.

Overconfidence happens when our mental pendulum swings to the extremely positive end of the simplified spectrum.

Every master of their craft knows that failure is NEVER in the rear view mirror, and that’s a damn good thing.

Confidence comes from experience, and experience is predominantly failure. We all begin failing at what we do. Trite, but often forgotten. My favorite Einstein quote sums it up nicely, “It’s not that I’m so smart, it’s just that I stay with problems longer”.

That means tolerating failure.

Which brings me back to the confidence fields. The men and women that have trained themselves (or developed tools) that make sure their mind’s tendency to look at only a select few experiences doesn’t take control. They know that life is not black and white, which means “failure” is entirely context specific.

In turn, this means that they have plenty of emotional fuel in the tank and brain power to spare.  They don’t push mistakes aside out of arrogance or fear or impatience; they stop and examine them, taking them apart like a child with a toy. They don’t see a negative P&L as a problem, they see it as an opportunity.

The problems they’ve overcome pile up behind them by the truckload. And on top of those piles…

That’s where you can find their confidence.