When each is taken alone, optimism and pessimism are not beneficial to the successful trader but when used in conjunction we have a different story. Let’s explore what I mean when I say “optimistic pessimism is good for the trader.”
PESSIMISM
Pessimism is defined as a tendency to stress the negative or unfavorable or take the gloomiest possible view. Obviously, the successful trader is not pessimistic. If so, then he would never trade in the first place or if he did, he would only trade short; a “permabear” if you will. A purely pessimistic trader would also doubt his edge, doubt any market direction, only trade after the move has happened, cut his winners short while allowing his losers to run, overtrade, under invest, etc etc. In other words, a purely pessimistic trader would break all the rules.
OPTIMISM
Optimism is defined as the inclination to anticipate the best possible outcome while believing that most situations work out in the end for the best. The unsuccessful trader, especially the beginning trader, is optimistic about getting rich in the stock market. No matter what every trade will eventually make money he reasons. The optimistic trader also loads up on a “sure thing”, seeks to justify every trade via confirmation bias, adds to losers, brags about winners while hiding losers, refuses to develop as a trader, etc etc. Just as with pessimism, the optimistic trader breaks the rules.
So can we find a happy medium? I believe so but only when we put the words and their meanings together.
OPTIMISTIC PESSIMISM
I define a trader’s optimistic pessimism as “rules based optimism that accepts a gain or a loss as the best possible outcome while maintaining a healthy dose of pessimism in a market where anything can happen.” Or, as I state in When 10 Is Greater Than 90,
“No matter how good your analysis, no matter how perfect your set-up or pattern may be, no matter how many others may agree with your analysis, and no matter how many wins in a row you have had, once you enter a trade anything can happen. In fact, you should be surprised every time you make money!” (18)
A trader should be optimistic about his historically tested trade set-up or “edge” knowing that when he follows the rules as outlined by that edge he has a high probability of making money. At the same time, the trader also knows and believes no two trades are the same. In fact, this trade may not work, So what! Who cares? Get over it? That’s just the way it is (and always will be)! In the words of Mark Douglas:
“The best traders can put on a trade without the slightest bit of hesitation or conflict, and just as freely and without hesitation or conflict, admit it isn’t working. They can get out of the trade-even with a loss-and doing so doesn’t resonate the slightest bit of emotional discomfort. In other words, the risks inherent in trading do not cause the best traders to lose their discipline, focus, or sense of confidence.” TRADING IN THE ZONE, p. 9.
Be optimistic about your rules based discipline and allow pessimism to guard your otherwise out of control emotions.
