This is a great point and article shared in my Facebook trading group:
From Simon Vuko: The below principles have massive trading implications for newbies:
‘The Dunning-Kruger effect explains that the problem isn’t just that they are misinformed; it’s that they are completely unaware that they are misinformed. This creates a double burden.”
“Studies have shown that people who lack expertise in some area of knowledge often have a cognitive bias that prevents them from realizing that they lack expertise. As psychologist David Dunning puts it in an op-ed for Politico, “The knowledge and intelligence that are required to be good at a task are often the same qualities needed to recognize that one is not good at that task — and if one lacks such knowledge and intelligence, one remains ignorant that one is not good at the task. This includes political judgment.” Essentially, they’re not smart enough to realize they’re dumb.”
– Psychology Today, 13th September 2016
Too many new traders rush into trading after a string of luck confuse luck with skill. Or they study a bunch of information and confuse knowledge with experience, actionable skills, and the right process. One of the most dangerous things for new traders and investors is to be ignorant of their own ignorance. The first steps in education in the finance world is learning what the right questions are to ask. Then understanding that so much of trading and investing is a psychological game more than a game of math.
Here are some warning signs of new traders that are blind to important market dynamics:
- They think big returns can be consistent and easy.
- They do not understand that bull market and bear market price action is very different.
- They do not see the importance of position sizing and risk management because they are over confident in their trading.
- They see no need for talking about trading psychology.
- They think trading is all about making a prediction and betting big on it and letting it play out with conviction.
- They have never heard of the term risk of ruin.
- They think successful traders are either flaunting mansions, girls, and sports cars or they are not successful.