Creating a Match Between Our Skills and Trading Goals

In order for us to perform at our very best, it is essential that we match our trading skills with our financial goals. The problem is, many of us either over-estimate our skill level or under-estimate it. This is a mistake that can be quite costly. Ari Kiev, author of the book, “Trading to Win: The Psychology of Mastering the Markets,” says that as traders we often fall into the trap of what he calls “impossibility thinking”. In other words, we begin to think that we are not capable of making good decisions and fear that we will get hurt. Of course, this is not always the case, but it does limit us from performing at our true potential. When we don’t correctly match our skills with our expectations, we fall into what Mark Douglas calls a “reality gap”. We end up missing out on opportunities when we under-estimate the amount of opportunities that are out there for us to seize. So, instead of us taking advantage of the skills we already have, we pass by valuable opportunities. We will only be able to succeed when we bring our skill level and expectations in line with each other.

The reality gap applies to us either under-estimating or over-estimating our skill level. If we are more creative individuals, studies have shown that we tend to be more accurate in our estimation of our abilities. On the other hand, those of us that are less creative tend to create overly high expectations.  Therefore, we attempt to reach impossible goals with the skills we have (our skills may be adequate, but not adequate for the expectations we have.) This will lead to feeling frustrated because we are never going to achieve those unreachable goals. On the other hand, if we remain realistic, we can be quite productive. We will develop the confidence we need when we have been able to practice our skills and learn what our abilities are, as well as our limitations. When we have this confidence, we can think more clearly and more creatively.

More experienced traders have an easier time matching their expectations and skills. As experienced traders we may tend to under-estimate our skills, but by developing a positive attitude and successfully combating those “impossibility thoughts”, we can reach our expectations. Terrance Odean, a behavioural economist, points out that for those of us that are less experienced traders, we often over-estimate our skills and trade accordingly. In order to accurately match our skills and goals, it requires a great deal of experience. This requires practice and a trial and error process. When we are beginners, we will sometimes win and sometimes lose. The trick is to minimise risk as we build up our experience so that we too can become more seasoned traders.

No matter what our level of experience is, how well we do in the market is highly dependent upon how well we match our skills and expectations. If we are new traders, we must remain patient, manage our risk and keep moving forward until we finally gain the experience we need to be more accurate in our assessment of ourselves. For those of us that are more seasoned, keep striving and know that it is likely that we can make even more profits if we maintain the right mindset.