Happy Monday, tradersâŚ
Jeff here.
A certain mental trap affects every trader across the board â from small-account beginners to billionaire veterans.
Itâs a phenomenon that doesnât care about the size of your portfolio, the years youâve been in the game, or how smart you areâŚ
Iâm talking about a key concept from the world of psychology known as The Dunning-Kruger Effect.
This effect is a cognitive bias that tricks people into misjudging their abilities.
The less you know, the more likely you are to overestimate your skills. And the more experienced and knowledgeable you become, the more likely you are to doubt yourself.
Iâve seen this countless times among my students (and even with some of the most masterful traders I know).
True experts often undervalue their abilities. They might experience âimposter syndrome,â constantly questioning whether theyâre good enough.
On the flip side, beginners think theyâre destined to be the next Warren Buffett after a few winning trades. Two weeks in, and theyâre already planning to quit their day job.
Are you really as proficient as you think? Or are you undervaluing your skills?
You must truly know thyself, which is easier said than doneâŚ
But hereâs the good news â by understanding The Dunning-Kruger effect, you can spot where you might be falling into this mental trap (and respond accordingly).
With that in mind, let me show you how to recognize (and avoid) The Dunning-Kruger Effect in your trading psychologyâŚ
Donât Overvalue Your Experience Level
Believe it or not, one great trade can actually be an up-and-coming traderâs worst enemy.
Iâve seen this happen time and time againâŚ
An inexperienced student nails one of their first trades. Maybe it was pure luck, or maybe they had a strong trade thesis.
Regardless of the reason, theyâre riding high after that initial success.
After this one successful trade, the newbie thinks theyâve cracked the code. In their mind, theyâre already a top-tier trader.
Theyâre brimming with confidence. They feel invincibleâŚ
Then comes the critical mistake â they size up BIG on their next trade. They take on a massive position, convinced their previous success wasnât a fluke, but proof that theyâre a natural-born trader.
Of course, theyâre wrongâŚ
One good trade doesnât make you a fully-formed trader. Anyone can get lucky on one setup, like hitting it big on a single casino bet.
But the market doesnât care how you did on your last trade, and it wonât go easy on you just because youâve had a bit of early success.
What happens next, more often than not, is that the overconfident trader ends up blowing their entire account on that next trade. One mistake and everything comes crashing down.
The lesson? Donât let a single trade define you â especially early in your trading career.
Slow and steady wins the race. Take your time, stay humble, and never stop learning.
Youâll not only avoid the trap of overconfidence â but also protect your account from unnecessary risks.
But Donât Be Too Hard on Yourself EitherâŚ
Even the most experienced traders can fall into the opposite trap â being too hard on themselvesâŚ
Itâs a balancing act. As crucial as it is to evaluate your trades, review your mistakes, and figure out where you went wrong â thereâs a point where self-criticism becomes counterproductive.
I know this all too well from personal experienceâŚ
When I got my first job on Wall Street, I was hired by a European fund. They brought on two of us to trade.
There was me, a two-point-something GPA from a big state school that’s only famous for having a good football team and a lot of hot chicksâŚ
And then there was my trading colleague, an Ivy League graduate with an immaculate resume.
We started trading live accounts together. Within the first 15 seconds, I put on my first trade.
Guess what happened in that trade ⌠it was a disaster.
I locked in a huge loss almost immediately. And to make matters worse, I did it again. And again. I kept making mistakes, getting crushed in the process.
It would have been easy to let these early losses define me. I could have thrown in the towel, convinced I wasnât cut out for trading.
But instead, I chose to put my head down and grind.
I didnât let those losses shake me. I kept working, learning, and eventually developed a verifiable edge in the options market.
Now, 25 years later, Iâm still here, still trading, and still learning.
But that Ivy League colleague of mine? The last I heard, he was selling insurance in Wisconsin.
The lesson here is simple: donât let early failures crush your confidence.
Trading is a marathon, not a sprint. Itâs about improving incrementally, day by day.
Forget about instant gratification. If you try to rush the process, youâll burn out or blow up your account.
Finding the Middle Ground
The Dunning-Kruger effect can impact traders at every levelâŚ
Newbies often fall into the trap of thinking theyâre trading prodigies after a few lucky trades.
Meanwhile, experienced traders can be their own worst critics, constantly doubting their skills â even when theyâve proven themselves time and again.
Both are dangerous mindsets. To succeed in trading, you need to find the middle groundâŚ
Cultivate a sense of humble confidence. Be eager to learn, especially in the early stages of your journey.
But once youâve got some experience under your belt, donât be afraid to take calculated risks.
Itâs all about balance. Keep your ego in check, but give yourself credit when itâs due.
Confidence is a necessary tool in trading â but so is humility.
Keep your head on straight, stay focused, and always strive for that balance between caution and confidence.
Happy trading,
Jeff Zananiri
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