Overconfidence in Trading

I don't necessarily know if this is classified as overconfidence in trading. I have this flaw where a string of profits would be followed by a string of losses, which tend to be slightly more. I'll give back all my profits and then some.
Is the overconfidence from the string of profits encouraging me to take suboptimal trades? I honestly don't know, but let's let this post be a review of my trading activity for the past while.

Let's start off with my first trade.

USDJPY 1-Hour


Trade Details:
  • Buy @ 106.55
  • Close @ 107.341
Trade Analysis:
  • The entry was good as the pair was in an uptrend over on the 4-hour and daily timeframes
  • USDJPY stalled on the hourly and pulled back to the 106.275 level
  • I entered in the direction of the trend shortly after price bounced off of this level
Trade Review:
  • In hindsight, I definitely pre-maturely closed this trade out of fear with respect to giving back my profits
  • Given the way the candlesticks were painting, there weren't any clear indication that selling pressure was building up

For my next trade, I'll need to show two charts. My analysis was based on the first chart while the second chart showed how I ignored the larger market structure.

NZDUSD 15-Minute
Trade Details:
  • Sell @ 0.597
  • Close @ 0.5946
Trade Analysis:
  • Price retraced back to the 0.6 price level and held resisted
  • I entered short after seeing the bearish bars being painted
  • I think this entry was optimal as I entered in the direction of the downtrend and was playing off of a major level
Trade Review:

NZDUSD 1-Hour
  • The problem with closing out this trade was that I neglected to look at the longer-term timeframe
  • Over on the hourly chart, we observed that volatility was low
  • In the downtrend, the pair retraced and held resisted so we could've expected further downside pressure
  • Overall, it was entirely possible to keep holding this pair instead of prematurely closing out

The above two trades serve as several lessons learned.

  1. Letting winners run. Let's not pretend that I don't have any losing trades. There will be times when my stop loss will be hit. I need to make sure that my winners are consistently larger than my losses in order to be profitable. It's unlikely that my winners will cover my losses if I keep closing them out too early or have the fear that I will be returning my profits.
  2. Tying into the first point, analysis should be made when closing out the trade as well. Why close out a trade until there is a reason to do so? The reason could be nearing a major resistance level or some other price action factor that signifies weakness in the trend. Looking at my two trades in hindsight, there was definitely no way that I was able ride the trend to the very top or bottom. However, there was an opportunity for me to trail my stop loss so that the trade would've been closed when price went against me. The point here is that I should close out the trade for the right reasons - not to protect the first sight of profits I see, but that there is a shift in the market sentiment.
  3. The final lesson learned is that profits fuel overconfidence. When you lock in a profit, you're fuelled by this idea that you're unstoppable. I certainly have experienced it. I felt that I was in the zone and my analysis was sound. This led me to taking suboptimal entries because I felt that I was sure to be right.
Let's take a look at some of the trades that didn't work out. For these subsequent trades, it's quite shameful that I took them. In hindsight, the quality of the setups weren't optimal. Naturally, I took them anyway, thinking that my previous winning trades meant something.

Gold 15-Minute
Trade Details:
  • Buy @ 1491.12
  • Close @ 1482.50
Trade Analysis:
  • Over on the 15-minute timeframe, I drew a horizontal support level
  • After seeing that price broke through this level and fail to push significantly lower, I entered a trade on the bar with a long lower wick
Trade Review:
  • This was probably the stupidest trade that I've ever made.
  • Over on the longer-term timeframes, there wasn't any indication that price was being held supported
  • Furthermore, these timeframes indicated that price was in a downtrend
  • On a final note, the 15-minute timeframe only indicated indecision, not a flow of buyers

The next trade wasn't well thought out either.

EURUSD 15-Minute
Trade Details:
  • Sell @ 1.0983
  • Close @ 1.0939
Trade Analysis:
  • I based this trade solely on the 15-minute timeframe, which was a mistake as I neglected to analyze the price structure over on the longer term timeframes
  • Over on the 15-minute timeframe, this pair stalled around the 1.0904 level and then sold off
  • I entered thinking that bearish momentum would pick up once again
  • What I didn't do was take a look at the longer term timeframes to see if there was any volume at all. If I had done that, I would've observed the following details:
    • This pair wasn't near any major levels
    • Overlapping bars signalled indecision and a lack of volume in general
Conclusion:

The first two winning trades led me to take sub-optimal entries on the following trades. The final kicker is that I actually took 2% risk on the two losing trades, while only 1% risk on the winning trades. As a result, this session was a net loss. On the risk side, I kept it contained in the sense that I was never risking more than 2% on any trade. However, it definitely required a lot more analysis on my part.

I think I previously mentioned this before that I couldn't scalp if my life depended on it. Similarly, I had a terrible track record trading on lower timeframes so I should've known better than to try to trade off of these 15-minute charts.

On a final note, less is more. I find it difficult, but crucial to be surgical and wait for the right moment to strike. It's much like my poker playing style - I'm not looking to steal chips all day long, but rather make the right plays and maximize value. For the plays that I have made, I didn't maximize value so it's not possible to classify them as a good play.