Overcoming Fear in Trading
© Article by Joe Ross
There are many types of fear that can plague traders.
- The fear of missing a trade
- The fear of losing money
- The fear of being wrong
- The fear of losing face with peers
- The fear of criticism
There are more than just the ones shown above. What can you do about fear? What steps can you take to overcome it?
The possible causes of anxiety and fear are many: conflict, health problems, dangerous situations, death, unmet needs, spiritual problems, false beliefs, lack of self-confidence, lack of faith in the way you have chosen to trade, etc.; but for traders, it is the action of price movement that brings about the greatest amount of anxiety and fear.
We need to create a consistent routine that will enable us to execute our trades according to plan, and without hesitation even after experiencing a string of losing trades.
Planning. I believe the most important single factor in eliminating fear in trading is for a trader to define and operate from a well-thought out trading plan. If you are not following your plan or if you don’t have one you will experience the horrors of the market the end result of which will be fear.
Quick exits when wrong. You should have a clear idea in mind of what you expect from price action upon entry into a trade. If you don’t soon see what you were anticipating exit the trade. Never trade when there is any doubt in your mind.
Use a time stop. Hand in hand with “when in doubt don’t trade,” is the use of a time stop. If your trade fails to meet your objectives within a certain period of time, exit the trade—win or lose. There are two ways to be wrong in a trade. The most thought of way is that of being wrong about direction. But what about being wrong in your timing? Doesn’t that count as equally important? How many times have you been in a trade, been stopped out with a loss, only to see the trade then move strongly the way you originally anticipated? You were correct about the direction. You were wrong about the timing.
Don’t overtrade. Don’t overtrade your capital and don’t overtrade your time. Trading too big—risking more than you should leads to losses and fear. Trading too often does the same thing. No one forces you to trade all the time. Never feel you must trade and never feel you must trade all day. Trading that way borders on addiction.
Be sure to pull the trigger. Here’s a little trick I have used with traders who had trouble “pulling the trigger.” Bring up an intraday chart of the market you want to trade. Blindly buy it and turn right around and sell it. Do this repeatedly (buy and sell) for 30 minutes to 1 hour. When you finish see what the monetary results would have been. In most cases, you will never again be afraid to pull the trigger. You can do this with real money or on a simulator. Your choice. I prefer you do it with real money.
Be humble. Wisdom indicates that pride precedes a fall. So you must avoid being prideful in your trading. Show humility instead of shooting your mouth off to others, keep your own counsel. Instead of letting the whole forum know about the great trade you made, be humble and teachable. Then you will not have to fear being wrong, losing face, or feeling shame. You will never know it all. Keep an open mind and hold your opinions to yourself unless they are requested by others.
Be aware that trading is dangerous. There is nothing wrong with realistically acknowledging and trying to deal with the identifiable problems of life. To ignore danger is foolish and wrong. But it is also wrong, as well as unhealthy, to be immobilized by excessive worry.
Keep your focus. Fear limits your focus, and this is particularly true in trading. One of the great ironies of fear is that we tend to bring the very thing we fear upon ourselves. Thoughts can create reality; thoughts charged with an emotion such as fear can realize the dreaded possibility with an amazing speed and effectiveness. What happens if you fear loss when you're trading? You’ve got it! You lose.
Get rid of unnecessary baggage. If you have been told by parents, siblings, friends, relatives, teachers, schoolmates, or anyone else that you are no good—not a worthwhile person, someone who will never amount to anything, or if you have been raised in a hellfire and brimstone "God is going to get you" religious atmosphere, you may need to stop believing those things and consider your self-worth. Each of us is a unique creation and all of us have value. Do not allow yourself to carry around an unnecessary burden of guilt (leading to fear) trying to atone for what others have told you. People, especially young children can be viciously cruel. You may not even remember what was said—the names you were called. You may have buried bad memories deep inside. Dredge them out, face them, and deal with them.
Study the markets. Studying the markets will eventually bring understanding. Understanding will, in turn, bring success. Success will bring rewards, and suddenly the market will be to you what it actually is: an impersonal arena in which those with understanding get paid to trade. With understanding, you will trade wisely. With understanding, you will see how simple trading can actually be. With understanding, you will garner money from the markets. With the successes you have in the marketplace, you will develop the courage of your convictions. Because trading will give you pleasant experiences, rather than fear.
Realize you don’t know the future. Let’s face it, you can’t tell me with absolute certainty where the next tick will be. You truly do not know what is going to happen next. Trading is based on probabilities. Sticking with the probabilities is what makes us successful in the long run. Do not overly focus on a single trade. Over-focus causes levels of fear to rise. You will become overly cautious. You will hesitate. You will try too hard to avoid mistakes. You will probably lose.
You won’t win every trade. The problem of fear is made much worse if you enter every trade with the "expectation" that it should be profitable. Be aware! After several winning trades, the feeling of invincibility supersedes being logical. This can lead you ignore a successful strategy and into trades that you normally would not have entered. Finding good trades is "only" accomplished by sticking to a proven plan. But finding poor trades, and ignoring your trading plan, seems to get much easier after a couple of winners. Never mistake genius for profits derived from your trading strategy. Genius loses money. Trading plans make money.
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© Copyright 2007 Joe Ross and Trading Educators, Inc.