by Van K. Tharp, Ph.D.
If I could give just one piece of advice to a trader, it would be: Avoid overconfidence—it could be your
worst enemy. Thousands of traders make the mistake of becoming overconfident each month and lose
substantial amounts of money. For example, the following incidents were brought to my attention just
A trader — whom we will call Henry — needed to make $7,000 each month to meet his living
expenses. This particular month was exceptional; he made $20,000 in two weeks making low-risk
trades and following his own trading rules. He was feeling on top of the world; he could do no wrong.
One Friday morning, however, he noticed a marginal trade that involved more risk than he normally
took. Henry decided to take it. The market immediately went against him and he was stopped out for a
$1,500 loss. His money management rules called for a maximum risk of $1,000 on a trade, so his early
morning results were totally unacceptable. As a result, he quickly opened up another high-risk
marginal position. By the end of the day, he'd lost a total of $4,500. The following Monday he was
still upset about losing $4,500. He took several more high-risk trades, only to lose another $3,500.
A trader in the Midwest told me that he had made $80,000 in profits on a $40,000 account in two
months of conservative trading. Then, he said, he stopped paying attention to risk — and blew out his
total profit in two weeks.
I visited a client in New York and spent some time talking to the firm's president about his trading.
Indirectly, the company president mentioned how he was trading — he had most of his money tied up
in large spread positions. I looked at what he was doing and told him that it could cost him his
company. In response, he told me that he was totally protected — that it was a spread position with
zero risk. Two months later, the firm lost $1.5 million from that position.