The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success

5.4. SELF-ESTEEM AND SELF-DISCIPLINE

When a trader reacts to his emotions, he often tricks himself into believing false notions about himself and his abilities. Because of a lack of information or an inability to correctly assess the information he has, he either overvalues his abilities—thinking he is far better at certain tasks than he really is—or he undervalues his potential—falling prey to insecurities and poor self-esteem. A trader who is able to observe his own emotions without reacting to them has to have both self-discipline and good self-esteem.

Self-discipline is the ability to do what needs to be done to enhance one's skills. It is an inner capacity to plan and organize one's time, to develop one's skills, and to maximize one's conditioning without the need for external monitoring. Self-esteem, on the other hand, is the confidence to achieve the goals one sets.

As self-esteem diminishes, the ability to take criticism is reduced, and each criticism is viewed as a personal attack. This inability to deal with failure simply confirms one's doubt about oneself. Since trading inevitably involves failure, a healthy self-esteem often differentiates the individual who will grow from the individual who will crumble in the face of defeat. An individual with good self-esteem will rebound from failure, often seeing a missed shot or a blown trade simply as a challenge to win at the next opportunity.

A direct benefit of positive self-esteem is the ability to make good decisions. ...