Overcoming The Fear of Trading
While the fear of losing money is quite common among new traders, there are a few other main fears that makes it hard for traders to reach a peak trading performance. They were fully described by Price Headley and he has written an amazing article that you can find here. I’d like, however, to provide my perception on each of the fears outlined by Price.
Once you understand the concept of fear in trading, you can work torward dealing with each fear. As a trader, understand that it is not possible to eliminate a fear of trading. The only thing you can do is to deal with it. So here are the fears you must learn to recognize.
Fear of Loss
The first fear, a really common one, is the fear of loss. After all, who wants to lose money? A trader might be hesitant to trade if he lost money in the past. As a result, as traders we can make the decision to reduce our trading. That, under most circumstances, is not a good thing to do. Let me explain… Overtime, a well-defined strategy should lead to profits when a high-enough number of trades are taken. However by reducing the number of trades you take because of fear, you are increasing your chance of taking losing trade.
The fear of loss in trading can be explained by the Endowement Effect. The idea is that people, as opposed to those around them, value more what they own. When losses are a possibility, the main thought is to limit them.
When you fear loss, your brain is also impacted and the decision-making process will be influenced. Not long ago, I came across an interesting study by Gregory Berns, the Director of the Center for Neuropolicy at Emory University. He ran an experiment in which brain images were taken from participants receiving electrical shocks. The shocks, only unpleasant, were given once at a random time between 1 and 30 seconds after starting the experiment.
After a while, participants began to fear the shocks themselves because they could not predict at which moment they would be given. Participants began to prefer receiving bigger shocks at a known moment instead of receiving a lower unanticipated shock. That shows how decisions can be impacted by fear.
Fear of Missing Out
Yes you can lose money in trading but what if you missed the trade that could give you huge returns? That is a common fear as well and it may cause us, as trader, to stay in front of the chart for long hours, waiting for THE best setup.
The fear of missing out is also the reason why traders enter trades too late. They’ve seen a signal that they didn’t act on but once they see a big favorable move, they decide to go in. That is dangerous because you are essentially trading on a wrong signal and not respecting the rules of your strategy.
The fear of missing out was present during the Dot-com bubble from 1997 to 2000. People started investing in internet stocks. After a lot of word-of-mouth, almost everyone had some investment in those stocks. Imagine someone who hadn’t invested just before the crash. That person would have had pressure from everyone around and the fear of missing out on a big opportunity most likely would take over. That’s how an increasing number of people contributed to the bubble.
I’ve been feeling that fear numerous times and I’ve been entering too late on so many trades. The remedy I found to eliminate making irrational decisions from the fear of missing out is to, very simply, take time off trading periodically. I first started by taking a week off trading. Once I got back to my trading desk, I felt refreshed and I had more clarity on what I had to look for on a chart. That made a huge difference and I recommend you to try it. It may not be easy because you do not want to miss a good trade. You must force yourself to step away and the results will be worth it.
Fear of Letting a Profit Turn into a Loss
That may also refer to the first fear described above. When you start to make money as a trader, the last thing you want is to lose the profits you accumulated into a trade. The fear of letting a profit turn into a loss is a key factors pushing traders to take profit too quickly or to close a losing trade when the stop loss hasn’t been hit yet.
From what I know, the best thing you can do is to detach yourself from your trading results. The truth is, your self-worth is not dependent on your trading account balance or the results of your past trades. In essence, you are represented by what you do in the market. If you respect your strategy, that’s a win, If you manage your trades effectively, you get another point and if you can manage your emotions, it’s also a win. You are not worth your profit. You’re worth your actions.
Now comes the technical stuff…If you want to manage your trades effectively to reduce the risk of letting a profit turn into a loss, you can either use the T1/T2 approach or a break-even stop loss move. You can check out my article T1/T2 Approach to Forex Trading for a good overview.
Fear of Not Being Right
As human beings, it is normal to desire being right all the time. Being right boosts our ego and it makes us feel better.
However, that’s not how it works in trading. That’s not even how it works in business. Before succeeding in business, entrepreneurs are wrong and they fail. Something similar occur in trading. While you don’t necessarily fail, you need to take losing trades because getting only profitable trade is impossible. Once you realize that, you must become an execution expert. You must become a pro at trade management because once you enter a trade, it’s the only thing you can do.
The question to ask yourself is:
“Do you want to be right or you want to make money?”
Choose wisely but I can tell you making money is much more rewarding. Let go off the ego, think execution, and follow a good strategy. You are going to see massive results.
Do you relate to any of those fears? If so, comment below and tell us how you plan to go over that fear!