What is ego? If ego is assessing everything in terms of yourself, of course it will damage your trading. If your attention is on yourself and what it means if you make or lose money, or what it means if you are right or wrong in your assessment, your focus will not be where it belongs.
Your focus needs to be on the market and your methods, not on yourself. The conscious mind is limited in what it can be aware of. If you're thinking about yourself rather than the actual trading, you could easily miss important cues.
When an ego is unstable, when a trader needs to prop himself up through the trading, make no mistake about it. That trader is in double trouble. His self-esteem will be damaged. And his trading will be sabotaged.
Traders who want to demonstrate how great they are will tend to overtrade in terms of size or frequency. While they may have some spectacular wins, overtrading will eventually destroy the account.
A trader who wants to protect her ego from being bruised by being wrong or losing money will tend to hesitate in putting on a trade. Consciously or unconsciously, she thinks something terrible will happen if she's wrong or if she loses money. Quite naturally then, she will delay until she has confirmation. She'll either miss the big trade, or worse still, chase it after it's too late.
Any trading method needs consistency in order for the probabilities to play out. If your ego interferes with the consistent application of the probabilities, you will essentially end up putting on random trades and getting random results, or losing money.
There are numerous instances of traders who get in trouble because of bloated or insecure egos. A prime example is Nicholas Leeson, the trader who brought down the Barings Bank by overtrading. His ego caused him to violate every rule in the book (and in the bank). He was so ego involved, he ignored the market's direction and force.
Another example is Victor Neiderhoffer who ran his hedge fund into deficit. In his book, The Education of a Speculator, he writes:
"I am an old trader, and I trade the yen in the cash market. I once had the best record among all the traders. I was rated number one in my field, and my picture was in all the newspapers. Customers crowded my doors. The attractive currency brokers talked sexy to me, told me where their customers' stops were, and where the central banks were buying and selling. The great Soros more than once called to have me trade for his own account."
"But I got in over my head. I bought the dollar when the dollar:yen was 93. It went to 88 in just a few hours. I was eaten alive. The banks will not give me credit anymore, and many of my customers have left. I still have some customers-people who are not happy with feeding all their money to the stock market. They are afraid that it will crash as it did in 1929 and 1987. They look to me to land a big return, but without risk or drawdown. I can do it; but they don't want me to gamble, and I cannot do it without gambling. The risk creates opportunity. Still, I am humble because I have lost many times."
He wasn't humble enough. His writing reeks with ego. He claims humility, yet he proceeded, even after writing this, to trade his fund into deficit.
How can you as a trader overcome the problems the ego can introduce? First of all, maintain a separation of yourself from your trading. As you separate yourself, you can say, "This is my trading. This is me." Realize you are more than your trading. It is very easy to become what we do and judge ourselves accordingly. We need to separate our behavior from our essence. "That is what I do. This is who I am."
Don't confuse the outcome of a trade with your own value. Keep your worth in perspective regardless of whether or not you meet a particular goal.
Get in touch with your own essence. Our human essence extends far beyond our ability to accomplish a given task at a given time. It's enough to simply commit to doing your own best.
View mistakes as learning experiences and forgive yourself. Take a learning from past mistakes and make those learnings part of your future guidelines.
Appreciate yourself. Notice what you are doing right. Notice the ways in which you are getting better. This will build self-esteem, and when you esteem (value) yourself, your ego will become more robust and resiliant, and you can keep it out of your trading.
What if you could separate your ego from your trading and understand that you are so much more than your trading?
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