After some of the best trading in years, social media sites are overwhelmed with celebrations of trading success. It appears the triple-digit gains are now the norm rather than the exception and that they are not going to stop anytime soon.
The best traders tend to have big egos. It is necessary to have a high level of self-confidence if you are going to take on high levels of risk each day in pursuit of outsized gains. Unfortunately, those big egos, especially when possessed by insecure folks, are a fertile foundation for stretching the truth.
Insecure traders not only lie to others but they deceive themselves. Many will never admit that trading is extremely difficult and failure is their constant companion. Rather than embrace the fact that they have enjoyed some good luck and good circumstances they pretend that they are never going to have any struggles again.
The best traders tend to have big egos. Unfortunately, those egos are a fertile foundation for stretching the truth.
To be successful at trading we need to embrace reality and stay aware of how hard it is to be a great trader. The impulse to brag about our success is strong but in most cases, it is covering up some harsh truths about our trading.
Untruths run rampant in the world of trading.
Here are my top 10 lies traders tell themselves and others:
1. I entered this trade at the exact perfect time. This is by far the most common deceptive behavior of traders. The folks who claim to own a stock that just made a huge move can't resist telling us about their perfect timing and great success. Most never seem to mention that they bought the stock in the first place. They just suddenly own it and we only hear about it after the fact. Rather than admit that this is useless information and nothing more than bragging, they will pretend they are being helpful by notifying us that they are now selling and booked a gigantic gain. Even if it is true that they did well on one trade. They ignore context and won't mention the dozens of other failed trades or the fact that their overall returns might not be so fantastic.
2. My position is "small." Traders know that you have to be honest once in a while and admit that a trade didn't work. Inevitably, when that does happen, the position is always "small" and the loss is meaningless. No one ever admits that they were buried in a position and suffered a major setback.
3. I have "protection" so it can't lose. A corollary of the "small" position lie is that the position was "hedged" with puts or some complex strategy and that prevented any real financial damage. If you listen to certain television programs, you would think that that it is impossible to lose money on a trade that is properly hedged.
4. I was never worried. Traders like others to think that they are extremely confident in their predictive abilities. They will claim that they anticipated wild volatility and bad chart behavior but were never worried about ultimate success. When you are a great trader, there is nothing to worry about.
5. I have a plan and I'm sticking to it. Traders know that you should "plan your trade and trade your plan." But more often than not, they just wing it and throw money at something that catches their attention. If the results are good, they like to say that it went just like it was supposed to. Very few traders have plans but when a trade works it doesn't matter.
6. I did my research. For many traders, knowing the name of the stock and what line of business it is in qualifies as "research." If the stock acts poorly, they will claim that their great insight into the fundamentals justifies sticking with it. The fact that they are competing against huge research institutions that spend millions and have access to top management is ignored since the trader sitting in his home office has special analytical skills.
7. My technical work predicted this action. Traders often use the phrase "my work," which means they spent a couple of minutes looking at a chart and drawing a few lines. The perception they hope to create is that they are conducting some complex mathematical calculations that will predict the future when what they are really doing is hoping. Inevitably, a precise target price will be calculated, but it becomes irrelevant as soon as there is a pullback.
8. This time is different. Those are the four most dangerous words in investing, but traders like to think that they are seeing something no one else is seeing. The market will surprise us regularly, but ultimately the cycles of ups and downs will always occur again. Just because the market is acting oddly in the short term doesn't mean that there is anything genuinely different about market conditions.
9. This is the next Apple (AAPL) , and I'm Warren Buffett. One of the hardest things to do in the market is to find a great company at a very early stage and hold it for the long term. This is what made Warren Buffett rich and innumerable traders tell themselves they have found the stock that is going to make them rich. They will hold it for years and are convinced if they are just patient a while longer they will be proven correct.
10. The market is wrong. One of the most dangerous lies that traders tell themselves is that the market is wrong when it doesn't do what they think it should. Price is always the ultimate truth, and the market decides what that truth is. Even if the market is acting irrationally, it can stay that way until you have run out of money. There is always someone out there with more money and more information than you, and they will determine the market action.
Trading is so potentially lucrative because it is so hard. And it's is even harder when you work hard to fool yourself and others.
Embrace reality. It will pay off.