You’re about to learn a vital lesson: Overconfidence can rip your trading account to absolute shreds.
Trading has nothing to do with feeling lucky or ‘being on a lucky streak’.
In reality, trading is all about probability. In essence, what are the chances of getting a trade right or wrong?
When you start ‘feeling lucky’ that’s when things can go wrong and you can make huge losses. In the worst cases, it can lead to King Kong syndrome.
Learn how you can avoid this humungous mistake by taking our free forex trading course!
What is King Kong syndrome?
King Kong syndrome is where a trader makes a winning trade or series of winning and it results in them trading more.
As they keep winning they become overconfident, believing that luck will repeat itself and they take more risks or fail to properly assess the situation of the market.
Usually, these traders are beginners without much knowledge of trading and in most cases, they may have put a huge lot size or use far too much leverage.
Both are lethal.
Our brains are trained to repeat things we like. Though this is very natural, it definitely doesn’t mean it’s good for us.
Eventually, though, the ‘lucky streak’ comes to an end and the trader makes a big loss, most likely losing all their gains and maybe more.
Beginners have literally emptied their trading accounts doing this.
Where does the term King Kong syndrome come from?
The exact origin of the phrase is obscure, but it is talked about in the book Forex Essentials in 15 Trades: The Global-View.com Guide to Successful Currency Trading and in chapter 8, Heuristic-Based Trading.
The authors define King Kong syndrome as:
“The emotional high that overtakes trader when they do exceptionally well for a period of time, such as making a dozen consecutive winning trades. Usually followed by a large losing trade and a reality check.”
Fear and greed are two of the main components the book cites that influence how a trader reacts with the market.
Check out the book and the authors’ website Global-View.
Who is affected by King Kong syndrome?
Pretty much anyone can fall into this trap when they start winning too much and think trading is easy. It’s not just beginners!
In trading circles, it is often regarded that you are at your most dangerous when you win far too often.
That said, in a study of overconfidence in investors republished by TurtleTrader, they found that men are more likely to be overconfident than women and trade more than they should.
In fact, men trade 45% more actively than women. The percentage is even higher with single men.
What other things can create false confidence?
Too much information can also be a factor.
Supposedly, studies have found that as people attain more information it increases their confidence in their ability to predict outcomes.
The problem is that this information is not always related to what they are trading, effectively giving them a false sense of confidence to predict an outcome of a trade.
Another factor can be that inexperienced traders can feel that their personal involvement in a market instrument will somehow favourably influence its outcome.
They feel that just by wanting the market to go up in price is enough for it to do so. This is similar to gambling in the sense that gamblers feel in control when the roll the dice.
Sensation seeking is a factor as well. When it is present alongside false confidence it can be deadly in a trader.
How can we stop King Kong syndrome?
Being aware of it is a good start, but there’s a lot more we can do to prevent it.
Have a trading plan
The most important part of your plan is risk management.
Perhaps the no. 1 thing a trader needs for their risk management plan is to know their risk-return ratio. Basically, how much are you willing to risk and how much are you aiming to get back?
On top of that, it is important to know when to enter and exit the market.
But your trading plan shouldn’t just be about one or a handful of trades, it should be wider in scope and with weekly, monthly and yearly goals.
With goals in place, you can prevent yourself from overtrading.
Once you have a plan together, strictly follow it! Don’t change your mind and try to chase a few more pips. It’s not worth it.
Your trading plan needs to be informed by market analysis
That’s both fundamental and technical analysis.
Fundamental analysis will make you aware of events that may have an impact on the market, negatively or positively.
By performing technical analysis you can work out with a good deal of probability what the outcome of a trade will likely be.
You can also look for a specific price or candlestick patterns that indicate a certain movement upwards or downwards is about to emerge.
Think like a trader, not like King Kong
By this we mean you need to get into the right mentality of a trader and trade without emotions; fear, greed, revenge should all be put aside.
If you feel them creeping into your trades, you should probably stop trading, do something else and clear your head.
There are many books written by traders on trader psychology that are worth having a look at.
It is also worth pointing out that understanding your mental state can be challenging and even more difficult to learn than the technical side of trading.
Another thing to get right is that trading is not a get rich quick scheme. Think of trading as a business and every business needs a plan.
Keep your strategy simple and don’t complicate it with things like leverage until you really understand the concepts behind trading. Even then take baby steps and start off small.
Further to the above, the best traders trade less not more.
The more you trade, the more risks you are exposed to. The best traders are actually more focused on not losing money, instead of making more.
They look strictly for situations with the best possible outcomes, which requires a great deal of discipline.
Another key thing professional traders do is diversify their risks, while overconfident traders under diversify. They are more likely to stick to trading one instrument.
Learn from your mistakes
It is also important to accept responsibility for your losses. Don’t blame other people and things for them.
If you don’t accept your losses as your losses, you’ll never learn what went wrong! By learning from these mistakes, you can prevent them from happening again.
Get yourself a trading journal to keep track of all your trades. Write down when you entered and exited, why you entered, what you did and, of course, the outcome.
Look for moments where you are vulnerable to King Kong syndrome, where too much winning made you lazy.
Look for trends
In the same study referenced above by TurtleTrader, they found that retail investors are more likely to buy big winners or losers, focusing only on what grabs their attention.
Essentially, they are either buying a very cheap market instrument because it’s cheap or very high, thinking it will continue to go up in price.
While there is a degree of logic to this it is wrong because the trader has failed to identify if there is any trend or not.
Without an upward trend, it is very likely that the trader will lose money.
If they buy high thinking it will continue to rise in price, it may have reached resistance levels and will start to go down.
And if they buy at a very low rate, what’s to stop it going even lower.
Then, to make things worse, it is very likely that such a trader hasn’t taken into consideration the timeframe. They don’t know when they will enter or exit this trade.
Strive for consistency
How did the most successful traders get to where they are today?
Did they ever make a losing trade?
No surely not!
Well, if that’s what you believe, we’d gladly like to banish that illusion. It’s a well-known fact that all traders, no matter how experienced, make losses.
If they all make losses, how can they be successful?
They are successful because they strive for consistency.
They can still be profitable even when 50% of their trades make a profit. This is because they make sure their bad trades are small and their profitable trades large.
Part of being consistent is having a strategy that can be easily repeated and sticking to that strategy.
Just because you made 200 pips on your trade doesn’t mean you should now use 1:500 leverage!
If anything, it means that the strategy you have just performed should be repeated and stuck to!
Reassess your goals as you trade
When things are going well, think about your risk. Don’t sacrifice it all by being lazy.
You should be thinking ‘Am I now risking too much? Am I going to large on this trade?’ Remember that your risks were not the same as when you started the trading session.
Look for signs that you are getting lazy or skipping some vital things like not assessing the market properly.
Confidence is still important!
Don’t let this article make you have a negative opinion on the role of confidence. It is still a very valuable asset for a trader.
Without confidence in your abilities, you might not trade at all and then you’ll never be profitable. You may never start or just quit.
However, genuine confidence has to be earned and comes with time and experience. Just don’t let your confidence turn into King Kong syndrome.
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If you remember anything from this article, make it these key points.
- King Kong syndrome is an emotional high followed by an emotional low. You start feeling happy when you repeatedly win, but that streak will end.
- There's no such thing as a winning streak in trading. However, probability most certainly does exist and can be measured. Put your faith there instead!
- Overconfidence can gut your trading account. The best traders trade less, not more!
- Having a trading plan can prevent overconfidence and overtrading. It also needs to be strictly followed.
- Genuine confidence will come with time. Confidence is good to have but it should be built upon a foundation of experience.
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