This post will cover the origins of fear, the 4 primary trading fears, how they might affect you as a trader, and how you can overcome them. I will discuss:
The Origins Of Fear
Fear kills more dreams than failure ever will, and is your biggest obstacle to success. But fear is a natural emotion that is intended to help preserve our lives by warning us of danger.
From the early days of our childhood, we learn about the dangers around us and how to avoid them—either by trial and error or from other people’s experience. To name a couple of examples, the memory of pain after touching a hot stove taught you to never touch it again; the countless times your parents crossed the road with you, taught you how to safely cross the road by yourself.
Your Trading Fears
But when it comes to trading, the situation is completely different. Firstly, you cannot really avoid the pain—losing money, for example—because losing money is an inherent part of trading. Secondly, most of the time there’s no one there to ‘cross the road’ with you countless times.
Most traders start trading after taking, at best, an online course; some join a trading room of some sort. But trading is a ‘lonely profession’, and more often than not, there’s no one to hold your hand and walk you through the dangers of trading.
The 4 primary trading fears are:
- Fear of being wrong
- Fear of losing money
- Fear or missing out
- Fear or leaving money on the table.
The Fear Of Losing Money
The fear of loss is probably the most common and strongest trading fear. Naturally, no one likes to lose money, and the more you lose, the more difficult it is to gain the losses back. The fear of losing money is so strong since the pain we feel when we lose money is more than twice as strong as the satisfaction you feel when you win the same amount.
The fear of losing when making a trade has several consequences:
To start with, the fear of loss makes you hesitant before pulling the trigger to enter a trader. By hesitating, you’re missing out on many good opportunities, and never really manage to test your trading methodology and gain confidence in your edge.
Slowly you’re reinforcing an adverse thought pattern called ‘analysis paralysis’, which refers to the tendency to overanalyze or overthink the trading setup without ever taking action.
Even worse, the fear of losing money prevents you from closing a losing trade at a small loss. When you don’t cut your losses, many other problems follow. Just to name a few: you’re putting your account at risk, you’re reinforcing negative behavior patterns, and your judgment in the following trades gets impaired.
One solution is to test your trading methodology on a paper account (demo trading account), and once you see satisfactory results, start trading small on a real trading account. This way, you’ll gradually reinforce a positive thought and behavior pattern of pulling the trigger once your trading signal appears.
The Secrets Of Professional Traders
Remember that even the best professional traders lose money. This is part of the game, and there’s no possibility to trade without ever losing money. The key is that professional traders cut their losses short and let their profits run. Indeed, it sounds easier than it is, but once you develop your trading methodology, with well-defined stop-loss and take-profit, you can get consistent results.
This is the one of the secrets that keep the professionals long enough in the trading game—both mentally and financially—to gain experience and accumulate fortune. The longer you can remain in the trading game, and gain confidence in your trading edge, the more likely you will start seeing better results and become a consistently profitable trader, under all market conditions.
Another secret to professional traders’ success is that they don’t think about the results of the trade, they focus on the trading process, and even enjoy it. They prepare themselves before each trade, they execute their trades flawlessly and according to their trading plan, and they perform a construction self-assessment after the trade. This is the only way to see continuous improvement; the positive trading results follow.
Bottom line, you’ll be wrong to believe that by not trading, you are moving away from the potential pain of losing money. In reality, you’re just moving away from potential future gains.
The Fear Of Being Wrong
Too many traders operate from their ego and care too much about being proven right in their analysis of the market. If you want to become a consistently profitable trader, you have to remember that trading is a game of statistics, and there’s no right or wrong. Your trading methodology should work over a series of trades, but you can never know in which of the trades your edge will work out.
Focusing on being right, rather than on the trading process and continuous improvement, is a function of your ego, and in order to be successful, you must put your ego aside. As long as you let your ego control your trading decisions, you will experience impaired judgment as a result of trying to feel good about your predictions and self-worth. As a result, you will find yourself taking winners very quickly, and letting your losses run—often hoping to exit at breakeven.
If you feel that you have to prove yourself to your family and friends, or have the need to be perfect in everything you do, your emotions will take over your trading process, and you will fail more often than succeed. Remember you don’t have to prove anything to anyone, not even to yourself. Just focus on doing things right, by the book, and the positive results will follow.
If you are perfectionist by nature, you are setting yourself up for failure in trading, because even the best trader in the world experiences losses along the way. It is simply impossible not to lose. Your objective should be to experience continuous improvement of the process, and see consistent positive results over time. You should avoid at all costs to measure your success on a trade-by-trade basis.
The Fear Of Missing Out
FOMO, the Fear Of Missing Out, is very common among day traders and investors alike. Day traders usually experience it when the market is moving in strong, clear trends, while they’re hesitating whether and where to enter. Investors normally feel it during runaway booms in the stock market, hearing their friends telling them about the tremendous gains and easy money.
When the pain of missing out on potential profits gets greater than the fear of losing money or being wrong, even the skeptics hop on the wagon, hoping that they’re not too late to join the party and take some of the profit.
The problem is that when you act out the fear of missing out, you’re basically saying “I don’t want to miss the train; get me in at any price!” By acting this way, you’re probably ignoring all the rules you’ve set for yourself, not following any trading plan or defined risk management.
The euphoria you’re feeling, thinking there could only be gains ahead in such a strong trend, is putting you in a blind spot, making you unaware of the potential dangers, and oblivious to the rules you have set in order to protect your trading account from these dangers.
The Internet Bubble of 2000, the housing market up until 2008, the cryptocurrency frenzy of 2017—these are all just a few examples of how the fear of missing out drives markets up and out of balance, and how people never learn from history. If you want to earn your living from trading, you have to be aware of the emotions that might impair your judgment, and avoid behaving like the herd.
The Fear Of Leaving Money On The Table
Most non-professional traders make this mistake over and over again, and do the opposite of the well-known trading adage: “let your profits run, and cut your losses short.” Usually, they take quick profits while letting their losses get out of control—wiping out their hard-earned gains and decimating their trading accounts.
The main reasons most traders are quick to take profits are:
- They want to feel good with the money they’ve just made. Locking in quick profits guarantees that they will come out as winners from this trade.
- They remember the pain they felt in previous trades, when the market turned around and took all the money they made. This time they’re not going to let the market take their money!
- They do not have a well-defined exit strategy, and they probably don’t keep a trading journal, so they have no tracking of what works well for them. They enter and exit their trades based on their feelings and emotions. Therefore, they have no idea of how to manage their trades, and how to act under changing market conditions.
The easiest way to approach this is to trade your plan, and review your trading journal to see what works and what doesn’t. Only if you define clear exit points, with a set risk-reward-ratio, will you be able to calibrate your trading strategy and optimize it. Once you see over time how well it works, you will be able to let the trades run until they hit your stop-loss or take-profit without worrying. Why? Because you will know that statistically, over a series of trades, your trading strategy works and that you are profitable.
To summarize, you can look at FEAR in 2 ways:
Forget Everything And Run or
Face Everything And Rise.
The choice is yours.
I hope you will choose to face your fears and challenges and rise. If this is the case, and you want to learn how to overcome your fears and master your trading skills, the Mental Trading Skill Set Workshop is exactly what you’re looking for.