Self-Efficacy In Trading

What is self-efficacy? It’s the trait we all wish we possessed – and often do – but then often overlook owing to emotion, bad luck, and a few other factors.

Self-efficacy is the belief that we can perform in a certain manner to achieve specific goals.

Now, most long-term traders when asked if they had a high degree of self-efficacy would answer in the positive. After all, you can’t execute winning trades without following your self-efficacy in trading plans in a highly capable manner.

However, in order to be a successful trader, self-efficacy must be constant, and it must involve realistic goals.

Which is very hard to maintain when you’re feeling despondent, greedy, or otherwise negatively influenced.

Setting goals

The basis for self-efficacy in trading is setting goals. Goals keep you from straying into negative emotional regions, and goal-selling energizes your trading efforts.

The thing is, there are goals and then there are goals.

One big mistake traders make is making a big, general goal. Say, for example, a trader decides: “I want to make $5000 this week”. This goal is highly unrealistic.

Why? The goal is general in nature, involves no logical steps, and involves no solid plans for achievement.

When it comes to the market and self-efficacy, set goals must involve small, immediate goals. Such goals should involve day-to-day trading, not expansive, idealistic dreams.

The reasons why smaller goals are helpful are not only because they are achievable, but because they are most likely to generate feedback and the opportunity to review information.

And when you get feedback and reviews on an achieved goal, you have the opportunity to learn, which is important in making successful future trades.

The right mindset

A lot of traders are able to set goals, but they forget how important it is to structure their work involving these goals.

Self-efficacy involves self-improvement, so in order to keep your efficacy level high you must be determined to research, be open to new ideas, but at the same time keep your eye on the goal.

Now, this may sound a bit trite – but it is also important to believe in your own ability and remain positive. Research shows that those who believe they can perform well are more likely to view difficult tasks as a positive challenge rather than a trial.

Setting up a smart plan of attack for a trade and diligently following it is hard work – and as a trader, you must repeat this behaviour over and over again.

You need to stay motivated, too, which is something those with high self-efficacy are more likely to possess – the stronger the self-efficacy, the more active the efforts.

Keeping your self-efficacy on track

Renowned psychologist Albert Bandura noted that there are a few sources of self-efficacy, with the most important being “mastery experience”.

This theory proposes that success raises self-efficacy whilst failure lowers it. The thing is, failure on one trade doesn’t mean you’ll fail in the next trade. As long as you stick to your self-efficacy and believe in your trading plan, you can avoid setting yourself up to fail.

Another key source is modeling. If you see your trader friends or colleagues around you succeeding, you’ll feel likely to succeed. If they fail in their trades, you’re self-efficacy will decrease.

One way to avoid this contagion of failure is to remain sure of your own trading ability, initiate plans, and keep your trading goals small, specific and achievable.

Carl Capolingua
Follow Carl on Twitter @CarlCapolingua
Head of Education
Australian Stock Report

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