Well, I don’t think “winning” is any reason to move up or not… I have “won” because there were only a few people in the class, one horse had a meltdown in the arena, and the other wasn’t ready for the level… and seriously, as others have said, there is no “should” if you are having fun and your horse is mentally and physically comfortable. Some will want to show where they know they can do well, and some will want to push the envelope. As a sometime eventer, I’m definitely in the camp of a 4 because you muffed a movement is not a life crisis…actually CRASHING, and going home via the ER, which I have done, is a lot more of a problem…
I think being realistic is helpful, at least in terms of enjoyment. I try not to look too hard at the pros floating around on Uber fancy horses - if I spent that much time in the saddle and had a purpose-bred horse, I might float around too, but I don’t and I don’t so no point in getting gloomy about it.
And I also think if you want to show, there is no substitute for showing - we are very lucky to have lots of inexpensive schooling shows, often at facilities where we have rated shows (so good footing, etc), and I find that going, warming up, and riding for a judge are invaluable prep experiences for a recognized show. I just did two schooling shows in 10 days prior to a move up to 3rd this week - first time I totally overrode the changes, worried I wouldn’t get them - got a bit of an explosion and “work in progress” from the judge…2nd time I was more relaxed and much quieter, and got two very nice changes. Will I duplicate in the recognized? Meh, who knows, but now I know I CAN get good changes riding more correctly, and it’s what I will shoot for.
if you ever have a chance to really watch a bunch of rides at a show, you will see a wide variety of competency at most levels. Aim for somewhere in there, and enjoy!