Why we are pessimistic, how it's hurting your trades, and what to do about it.
Humans have a natural tendency towards risk aversion. It's a survival mechanism engrained in us over thousands of years of evolution. But there's more to it than that.
Pessimism sounds smart
In his book titled, "The Psychology of Money" Morgan Housel writes about The Seduction of Pessimism.
"Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you."
"Pessimism is intellectually captivating"
But the odds are stacked against the pessimistic trader. The market spends most of its time going up. SP 500 returns are positive more than 50% of the time on a daily, monthly, quarterly, and annual basis*. Having an overall bias towards bullishness keeps you pointing towards the higher probability outcome.
Here's how to do it in three simple steps.
Visualize your trade working perfectly
Focus on your price target before your stop. You're not taking the trade with the intention of getting stopped out. Even though there's a good chance that will happen, its not the goal. So focus on the goal. Visualize the goal.
Be confident in your game plan
Of course there is a chance the trade won't be a winner. But you've already addressed that by using a proper stop and correct position sizing. So let it go. It's already taken care of.
Be at peace with the outcome
You should know from your journal and trade reviews that your winning percentages is not 100%. You're going to have losing trades. And if you've analyzed your trades correctly you should know almost exactly what your odds are.
*Historical Frequency of Positive Stock Returns