Overconfidence versus Knowledge

An inefficient market suggests that the actual trading price differs from the fundamental value of a security. A trader who is overconfident will attempt to exploit every mispriced opportunity they find. The knowledgeable trader is different from the overconfident trader because:

• They know the difference between luck and skill and build on the latter
• They understand that some risks aren’t worth taking and simply move on to the next trade
• They recognize that, as in poker, there are others in the “game” and that others’ mistakes can increase risk as well as opportunity in the market.

Confidence is needed as you believe in your system of approaching the markets. The knowledgeable (seasoned) traders avoid letting their success lead to overconfidence.