Realistic Optimism

Jack and Jill have just started a small trading business. Jack says, "I can feel it. We're going to make a fortune. By this time next year, we'll be rolling in money." Jill counters, "I doubt it. That would take a miracle." Jack says, "You're such a pessimist. Why are you so bleak?" Jill argues, "I think we'll be successful. But I don't think it's going to happen overnight. It's going to take some time, and a lot of hard work!" Jill is a realist. She knows they will make huge profits eventually, but she does not falsely believe that a miracle will happen. Becoming a winning trader will require that you overcome endless setbacks. It's important to be optimistic, but it is more important to be realistic. If you are overly optimistic, like Jack, you are setting yourself up for failure. You may take unnecessary risks, or be especially disappointed when you encounter the endless setbacks that are commonplace in trading.

If you want to beat the odds and become a winning trader, then you must doggedly make trade after trade, even when you face endless setbacks. It takes a rare person to be able to pick oneself up after a fall and be ready to face each setback with enthusiasm. Dr. Martin Seligman has studied how an optimistic mindset helps people persist in the face of setbacks. Optimists, for example, do better in school, win more elections, and succeed more at work than pessimists. He's studied several occupational groups from top notch winning athletes to traders on the floor of the exchange, and in all these studies, he's found that optimists do better. What's their secret? It is in how they explain setbacks or failures. They don't blame themselves. They don't believe that success or failure is a matter of enduring personality traits. Instead, they explain setbacks as the result of minor, controllable, situations that have nothing to do with them personally. They believe that with enough persistence, they will succeed.

That said, pessimism has its virtues. Pessimists may feel badly most of the time but research studies have shown that they more accurately judge how much control they have over situational circumstances. Pessimists are more realistic in their judgments, and thus, it may be beneficial to occasionally think pessimistically. Optimism may make you feel good, but pessimism helps you evaluate the feasibility of your plans, goals, or ideas. Traders, especially novices, are notoriously overly confident. According to behavioral economist Terrance Odean, novice traders tend to over-trade and are unrealistically optimistic. It's vital for survival to have realistic expectations when it comes to trading. Optimism helps you persist in the face of a setback, but a healthy sense of skepticism will keep you based in reality.

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