Overconfidence

Overconfidence is a cognitive bias where an individual's subjective confidence in their judgments is reliably greater than the objective accuracy of those judgments. In trading, this manifests as a trader believing they possess superior analytical skills or predictive power than evidence supports. This can lead to underestimating market risks, overestimating potential returns, and ignoring contradictory information.

For a retail trader, overconfidence often results in taking larger position sizes than prudent, neglecting stop-loss orders, or deviating from a pre-defined trading plan. This can lead to significant drawdown, particularly after a series of successful trades, as the trader may assume past success guarantees future results. It increases ruin risk and undermines disciplined risk management.