Why knowledge and experience prevent traders from making money

опыт торговли на бирже

Amazing fact, isn’t it? It would seem that the experience of trading on the exchange should bring only positive results, however, in practice it turns out not quite as expected by the trader. Tell me, who often gets into accidents: novice drivers or experienced? Statistics show that there are cases of accidents of those who have just first days behind the wheel, and those who have already decided that he is the skilled one. Similarly in trading: the most common mistakes made by those who have just opened a live trading account, practice on demo platform, and those who are fully confident in their abilities. Simple psychology.

Why is the experience of trading on the stock exchange can bring harm

Credit Suisse analyst Jonathan Horlacher believes that the more the traders have knowledge and experience, the more often they make a financial loss. The main enemy of the trader — the arrogance that appears after a series of successful trades. The perception of the market becomes somewhat different, which immediately leads to gross errors.

By the way, returning to the driving experience. Swedish psychologist Ola Svenson conducted a survey among motorists, as they assess your driving experience. Despite the fact that evaluation criteria are clearly established, was not, 93% of drivers rated their level above average, which is impossible in principle. In trading the situation is similar. How to assess the level of knowledge and experience of trading on the stock exchange? The number of profitable trades or earned money? Then what is considered an average level, if there is no limit to perfection? To estimate the trading experience at any scale is impossible, because a scale cannot be created. But still a little bit successful traders will tell you that they are almost a guru in the trade.

As reported by Credit Suisse analyst, in his review, professional traders (i.e., trading experience and market understanding) are more likely to be victims of their own overconfidence than those who are just beginning to explore the market. The reason is that at the initial stage of investing, people tend to minimize risk and caution, but after that the sense of self –preservation vanishes. And when the number of errors begins to grow, the investor attribute luck to his own experience, lost — external factors.

In 2004, business psychologists Gustav Torngren and Henry Montgomery conducted a survey among traders: they broke them into two groups (beginners and professionals) and asked to predict the behavior of the trend of certain stocks, and then to call it, in their opinion, the percentage of accuracy (probability) of its forecast. Novice traders estimated prediction at 57%, professionals more than 60%. The result: the predictive accuracy of beginners was 50%, professionals — 40%. When both groups were asked what they were guided in their assumptions, newcomers said — a market analysis professionals — on experience of trading on the exchange.

The researchers note that overconfidence in predicting market prices leads to the fact that investors overestimate the expected profit and the success of transactions, forcing them to increase the volume of transactions and turnover trading.

  • And here’s another interesting statistic. Studies in the USA showed that the male invests 45% more active than the women, but the average profit is less than the men somewhere by 0.94 p. p.

In the review of Horlacher also offers ways of dealing with overconfidence:

  • do not rely on the forecasts of analysts (how many people, so many opinions, besides is not always accurate);
  • give priority to long-term strategies;
  • make a written list of the potential risks before opening a key position;
  • select assets with the lowest risk of loss and not fast growing tools;
  • to recognize the artificial inflation of the bladder in time;
  • not to trade with high leverage (not to abuse the loan money), set a stop-loss.

Some analysts think a little differently. Long-term strategy will be relevant in emerging markets, but in falling you can pay attention to short-term speculation. In any case, no matter the trading experience on the exchange, needs to diversify trading strategies.

Summary. Whatever your experience of trading on the stock exchange, try skeptical approach to received success. Sometimes the profit may be evidence of random market factors. And if a trader, based on his own experience, begins to guess the trend, it could result in the nullification of the deposit. And of course, do not be afraid of losses!

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