This is the major reason why beginning traders are drawn to dis- cretionary trading. Discretionary trading feeds the ego; it is trading that relies on oneâs judgment, in contrast with systematic trading, where trading decisions are made by using rules that specify exactly when and how much to buy and sell. So when you use your judg- ment to trade and you win, the ego wins. You can then brag to your friends how you are the master of the markets.
I see this particular behavior constantly on online trading forumsâespecially the broad-based ones that attract new traders. You regularly see posts from individuals bragging about how they bought just before a run-up, or they have found the Holy Grail and have a 90 percent accurate system, or they have been trading for three months and have made 200 percent. They invariably have done this by trading with too much leverage, so they might have turned $5,000 into $15,000; however, they run a very high risk of losing that $15,000 because they are trading too aggressively. A few months later, you may see the same traders post that they have blown up their account and lost everything. These individuals were trading to feed their egos, and as the saying goes, live by the ego, die by the ego.
There are many successful discretionary traders, but there are far more unsuccessful ones. The biggest reason for this is that the ego is not your friend as a trader. The ego wants to be right, it wants to predict, and it wants to know secrets. The ego makes it much more difficult to trade well by avoiding the cognitive biases that hinder profits.