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4 Trading Fears and How to Overcome Them
08/25/2020 9:15 am EST
Frank Kollar of FibTimer.com explains how you can overcome your doubt and fear and still make solid, profitable trading decisions.
All market timers, traders, and investors in every kind of market feel fear at some level. Turn on the news one day and hear that a steep, unexpected selloff is taking place and most of us will get a queasy feeling in our stomachs.
But the key to successful, profitable market timing—in fact, in all trading—is in how we prepare ourselves to handle trading fears. How we prepare to deal with the risks inherent in trading.
Mark Douglas, an expert in trading psychology, says this about trading fears in his book, Trading in the Zone : “Most investors believe they know what is going to happen next. This causes traders to put too much weight on the outcome of the current trade, while not assessing their performance as a probability game that they are playing over time. This manifests itself in investors getting in too high and too low and causing them to react emotionally, with excessive fear or greed after a series of losses or wins.”
As the importance of an individual trade increases in the trader’s mind, the fear level tends to increase as well. A trader becomes more hesitant and cautious, seeking to avoid a mistake. The risk of choking under pressure increases as the trader feels the pressure build.
All traders have fear, but winning market timers manage their fear, while losing timers (as well as all traders) are controlled by it. When faced with a potentially dangerous situation, the instinctive tendency is to revert to the fight or flight response. We can either prepare to do battle against the perceived threat or we can flee from this danger.
When an investor interprets a state of arousal negatively as fear or stress, performance is likely to be impaired. A trader will tend to freeze .
There are four major trading fears. We will discuss them here, as well as how to handle them.
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Fear of Losing
The fear of losing when making a trade often has several consequences. Fear of loss tends to make a timer hesitant to execute his or her timing strategy. This can often lead to an inability to pull the trigger on new entries as well as on new exits.
As a market timer, you know that you need to be decisive in taking action when your strategy dictates a new entry or exit, so when fear of loss holds you back from taking action, you also lose confidence in your ability to execute your timing strategy. This causes a lack of trust in the strategy, or more importantly, in your own ability to execute future signals.
For example, if you doubt you will actually be able to exit your position when your strategy tells you to get out, then as a self-preservation mechanism, you will also choose not to get into a new trade. Thus begins analysis paralysis , where you are merely looking at new trades but not getting the proper reinforcement to pull the trigger. In fact, the reinforcement is negative and actually pulls you away from making a move.
Looking deeper at why a timer cannot pull the trigger, a lack of confidence causes the timer to believe that by not trading, he is moving away from potential pain as opposed to moving toward future gain.
No one likes losses, but the reality is, of course, that even the best professionals will lose. The key is that they will lose much less, which allows them to remain in the game, both financially and psychologically. The longer you can remain in the trading game with a sound timing strategy, the more likely you will start to experience a better run of trades that will take you out of any temporary trading slumps.
When you’re having trouble pulling the trigger, realize that you are worrying too much about results and are not focused on your execution process.
By following a strategy that unemotionally tells you when to enter and exit the market, you can avoid the pitfalls caused by fear.
Wealthy traders learned long ago that unemotional (non-discretionary) timing strategies prevent losses during emotional times in the market. They know the strategies work, so they put aside their fears and make the trades.
And remember, you must be able to take a loss. Consider them a part of trading. If you cannot, you will not be around for the big gains because you will be on the sidelines guarding your capital against that potential loss.
Remember that good timing strategies are designed to guard against big losses. Every trade you take has the potential to become a loss, so get used to this reality and take every buy and sell signal. That way, when the next big trend starts, you will be onboard and profit from it.
Fear of Missing Out
Every trend always has its doubters. As the trend progresses, skeptics will slowly become converts due to the fear of missing out on profits or the pain of losses in betting against that trend.
The fear of missing out can also be characterized as greed of sorts, for an investor is not acting based on some desire to own the stock or mutual fund other than the fact that it is going up without him onboard.
This fear is often fueled during runaway booms like the technology and Internet bubble of the late-1990s, as investors heard their friends talking about newfound riches. The fear of missing out came into play for those who wanted to experience the same type of euphoria.
When you think about it, this is a very dangerous situation, as at this stage, investors tend essentially to say, “Get me in at any price; I must participate in this hot trend!”
The effect of the fear of missing out is a blindness to any potential downside risk, as it seems clear to the investor that there can only be gains ahead from such a promising and obviously beneficial trend. But there’s nothing obvious about it.
Remember the stories of the Internet and how it would revolutionize the way business was done. While the Internet has indeed had a significant impact on our lives, the hype and frenzy for these stocks ramped up supply of every possible technology stock that could be brought public and created a situation where the incredibly high expectations could not possibly be met in reality.
It is expectation gaps like this that often create serious risks for those who have piled into a trend late and well after it has been widely broadcast in the media to all investors.
It is not the timing strategies that keep timers from being profitable; it is the fears-which we all have at one time or another-that keep us from making the trades.
Fear of Letting a Profit Turn Into a Loss
Unfortunately, most market timers (and traders) do the opposite of “let your profits run and cut your losses short.” Instead, they take quick profits while letting losers get out of control.
Why would a timer do this? Too many traders tend to equate their net worth with their self-worth. They want to lock in a quick profit to guarantee that they feel like a winner.
How should you take profits? At FibTimer, we trade trends. Once a trend begins, we stay with that trade until we have enough evidence that the trend has reversed. Only then do we exit the position. This could be days if the trend signal fails or months if it is a successful trend.
Does this sometimes result in small losses? Yes. If we have a false signal to start with, it can. But we must look at market history to understand this trading concept. History tells us that while there are times when the markets trade sideways or make failed moves, once a real trend begins, it usually lasts much longer than anyone expects.
That means for the few failed trends, the real ones last a very long time and generate huge profits. But because no one knows ahead of time which signal is the start of the next big trend, we must trade them all.
What happens in the short-term can be accepted because we are assured of profits in the long-term as long as we stay with our timing strategy. We do not try to quickly lock in profits. We stay with the trend until the trend changes.
This way we obtain every bit of profit that the markets will give us. And we do not have to worry about locking in gains. We let the markets themselves tell us when to do it.
Fear of Not Being Right
Too many market timers care too much about being proven right in their analysis on each trade, as opposed to looking at timing as a probability game in which they will be both right and wrong on individual trades.
In other words, by following the timing strategy, we create positive results over time.
The desire to focus on being right instead of making money is a function of the individual’s ego, and to be successful, you must trade without ego at all costs.
Ego leads to equating the timer’s net worth with his self-worth, which results in the desire to take winners too quickly and sit on losers in often-misguided hopes of exiting at breakeven.
Timing results are often a mirror for where you are in your life. If you feel any sort of conflict internally with making money or feel the need to be perfect in everything you do, you will not be able to stay with the timing strategy, but instead will allow your emotions to step into the timing process.
The ego’s need to protect its version of the self must be let go in order to rid ourselves of the potential for self-sabotage.
If you have a perfectionist mentality when trading, you are really setting yourself up for failure because it is a given that you will experience losses along the way in timing, as in any trading.
You can’t be a perfectionist and expect to be a great market timer. If you cannot take a loss when it is small because of the need to be perfect, then the loss will often times grow to a much larger loss, causing further pain.
The objective should be excellence in timing, not perfection. You should strive for excellence over a sustained period, as opposed to judging that each buy or sell signal must be perfect.
The great timers make losing trades, but they are able to keep the impact of those losses small.
For the market timer who is dealing with excessive ego challenges, this is one of the strongest arguments for mechanical systems. With mechanical systems, you grade yourself not on whether your trade analysis was right or wrong. Instead, you judge yourself based on how effectively you execute your system’s entry and exit signals.
Mechanical systems are all that we use at FibTimer. Years of trading experience has taught us that there is no way to keep emotions from affecting trading, except by following unemotional, non-discretionary strategies.
As a market timer, you must move from a fearful mindset to a mental state of confidence. You have to believe in your ability to execute every trade, regardless of the current market sentiment (which is often at odds with the trade).
Knowing that the timing strategy you are following will be profitable over time builds the confidence needed to take all of the trades. It also makes it easier to continue to execute new trades after a string of small losing ones.
Psychologically, this is the critical point where many individuals will pull the plug, because they are too reactive to emotions as opposed to the longer-term mechanics of their timing strategy.
And typically, when traders pull the plug and exit their strategy, it is exactly at that time that the next profitable trend begins.
Too many investors have an “all-or-nothing” mentality. They’re either going to get rich quick or blow out trying. You want to take the opposite mentality: one that signals that you are in this for the long haul.
As you focus on the execution of your timing strategy, while managing fear, you realize that giving up is the only way you can truly lose. You will win as you conquer the four major fears, gain confidence in your timing strategy, and over time, become a successful (profitable) market timer.
3 Ways to Overcome Fear in Trading
By Robert Colville on April 30, 2020
The emotion of fear has been hardwired into us to protect us from danger since the dawn of mankind. But it is this one emotion which so frequently cripples the novice trader, causing them to make costly and often disastrous “heat of the moment” decisions when it comes to trading financial markets. Sound familiar? You must overcome fear in trading.
This article will show you how to overcome fear in trading by uncovering the three biggest fear-driven pitfalls people. Not only will it show you the catastrophic effects such fear-based thinking may be having on your trading, it will tell how you can conquer this emotion so that you can trade in peace – once and for all.
Overcome Fear in Trading Today!
Face it, most of us have been there. Fear is all around us and not only does it influence the decisions we make, it also drives the market. But how you deal with it is what will set you apart from the rabble and determine your long-term success as a trader.
Having an emotional attachment to the outcome of the trade
Ever found yourself going boggle-eyed in front of the screen watching your trade? If it’s in profit then you are one happy bunny. But, God forbid, the trade is losing money then you are helplessly frustrated…staring at the screen…hoping. If this sounds familiar then you’re on an emotional rollercoaster. For every movement the trade goes in your favour, a feeling of euphoria takes over. But when your trade goes against you in the “wrong” direction, an overwhelming feeling of frustration and self-doubt rears its ugly head. The more you do this, the more mentally exhausted you get.
Fortunately, there is an easy remedy for this; Put that mouse down and walk away from the screen!
Accept that sometimes you win and sometimes you lose – just like as in that great pantomime called life. If (and hopefully) you do trade with positive reward to risk and have risked no more than 1-2% of your account’s value on the trade then there’s every reason you should be at peace with the world. After all if the trade goes in your favour then you should console yourself that you are set to make more than you have risked.
If the trade goes against you then at least you’ve only lost small. If have risk managed the trade and have rationalised the upside on a big win versus the downside of smaller loss then you can simply leave the market to do its thing while you go about your merry day.
Fearful of missing out
Many people delude themselves by thinking that if they’re not in the market – they are not making money. If you’ve ever found yourself enraged with the lack of trade set-ups your trading strategy is giving you…then it’s pretty likely that, at some point, you’ve been guilty of trading set-ups that don’t actually exist. Anything to try make that quick buck and justify the time spend looking, right?…
…Except you’re frantically scouring each and every chart of every currency pair, stock, or commodity that you can get your hands on in the hope of finding a trade…anything! You watch the charts moving across the dozens of asset classes on your broker platform and remain terrified that you’re actually losing out by not having a trade running and being in the market. So, fearful of missing out, you place a trade out in the hope that you will make something from simply “being in the game”. Except that you lose money. Now you’re angry. You know deep down that you’ve been a naughty boy and all you want to do now is make your money back and a little bit extra to make it worth your while. Except that third and final trade which has been driven by both fear and anger loses and costs you more.
It may sound cliqued by always stick to your trading strategy. If you don’t have one then find one which resonates with your personality. This is essential for your long term success trading and survival in the markets. Rule-based trading strategies are mechanical by their very nature with their rules for entry, management and exit…and we should follow them according to their rules instead of how we may feel. But feelings are very subjective, aren’t they? Rules, however, are set in stone. Consider that these rules are filters, designed to keep us out of the market if there is no trade-set up worth taking – if the strategy’s rules for entry are not met then it’s a warning sign that the probabilities in the market are not in our favour for a potential winning trade. And it’s these probabilities week seek to play to our advantage as technical traders. Do not ever feel like you’re missing out of a profitable trade from staying out of the market – just think of how many bad trades you will be steering clear from! For every instance there isn’t a trade set-up based on your strategy, celebrate it as an opportunity to preserve your capital.
Fearful of failure (…and success)
Nobody likes losing. For many, not only is losing the trade simply a financial hit but an emotional one too, where the ego has also taken a fall. But have you ever found yourself staying out of the market even though you know that the trade set-up fulfils all of your strategy’s rules for entry? Perhaps you’ve taken a few losses and you just can’t handle the prospect of taking one more. Or, on the flipside, you’ve had a fantastic run and you don’t want it to end so you avoid trading a picture perfect set-up in case it is a loss…even though you know deep down that it ticks all of the boxes.
Even if this sounds vaguely like you, ignoring trade set-ups which conform to your strategy’s rules for entry is self-sabotage – a hallmark of the amateur trader. You will have taken yourself out of your strategy’s flow of opportunity.
Remember that any strategy’s overall success is determined from the net sum of all trades you place. But you do have to play the game in order to win. Ever heard the clique: “sometimes you have to win the battle in order to win the war”? Trading is no exception to this! Appreciate that incurring both winning and losing trades are both part and parcel of trading. Some strategies win some of the time, some strategies have winning set-ups most of the time….but no strategy wins the whole time. If you have a set-up which fulfils your rules for entry – take it. By ignoring it, you may have avoided a potential loss if it’s a loser…but then you may have denied yourself of a win if it does go “the right way”. Suffice to say, if you are looking at a set-up with positive reward to risk (ie: 3:1) then the potential reward forfeited is far greater than the loss avoided (1%).
Provided you trade profitable strategy with a positive reward/risk profile, risking no more than 1-2% of your trading account per trade there really isn’t much that much can go wrong. You can trade peacefully and at ease, safe in the knowledge that your edge is well and truly steeped in your favour. Why would you want trading to be anything but?
If you’re trading for long-term gain then it’s essential to have long-term vision. Some trade outcomes reward us with good gains – others give us a loss or a “breakeven” outcome…regardless of how “good” the set-up looks.
As technical traders, it’s essential that we remain mechanical in the way we trade, sticking to the rules of our strategy. If you do this and you are still losing money then don’t worry – it’s not you – it’s your strategy which is to blame! If that is the case then either adopt a new one which resonates with your personality or tweak your existing one.
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How I Overcame my Fear of Trading
A fellow trader asked me to do a blog about how I overcame my fear to take trades. I have to admit that it was a long process for me to truly overcome my fear of trading. Once I realized that it is natural to feel the way I do because to be a successful trader you have to react contrary to human nature. This caused me to go out and try to understand what is happening in my brain so that I could figure out how to retrain my way of thinking.
The reason why I believed that I could retrain my brain is because when I was in college I was diagnosed with dyslexia. I had been able to mask the problem up until that point because I learned how to adapt to my disability and function in school just like an average student. My teachers nor my parents ever knew. Then when I started college I had a professor who wanted us to write in pen because she wanted to see our corrections. That wouldn’t have been a problem if we did it out of class but we had to write essays in class. So I tried to adapt again and buy erasable ink pens. My professor knew that trick. Needless to say she once she saw all the corrections I had to make she knew I had a problem and referred me to be tested.
What I Learned
Once I began getting help with my dyslexia I began to gain confidence in myself and I was able to take more chances and risks as it related to my scholastic career. All this was made possible because they helped me reprogram my brain as to how it processed the information I was taking in and the information that was coming out of it. So once I made the connection with the fear I had in trading and whether or not I was seeing the patterns or the setups correctly with the same fear I had with my schoolwork, I knew I needed to do some research on the psychological aspect of trading.
So in my research I found something called Neurofinance. This studies the relationship between the brain and money. Studies have shown that trading activates the same primitive centers in the brain that are responsible for self-preservation. These are the primal emotional and defensive layers of the brain that do not respond very well to will power (self-talk). In fact, the brain is hardwired to prevent you from turning off its primal circuits, its core defensive and reactive processes.
Why? These processes, such as fight, flight and pursuit have great survival value. When these primal parts of the brain are in control of your trading you are most likely to automatically do the opposite of what you consciously intend. It may feel like self-sabotage, but it is not diabolical… it is biological. It is just your self-preservation instincts taking control. It is difficult to manage an instinct, which is one reason why so many traders under-perform and eventually fail.
Normal human instinctual fear, which may be worsened by your genetic makeup, will interfere with trading success because it will make you more reactive to the randomness in the market. Winning traders are either not afraid or carefully manage their fear.
Most traders who trade scared are also trading scarred. Normal losing trades and periods of drawdown are processed normally, as expectable–if somewhat disappointing–events. When losses are substantial, however, they can be processed as traumatic events. Instead of being processed through normal, explicit, verbal channels, they activate the flight/fight emergency mechanisms of mind and body, leaving their emotional imprint. Later, events similar to the traumatic losses–even normal ones–can trigger the emotional and physical reactions of emergency, including paralyzing anxiety.
Once trading becomes associated with painful experiences, traders come to expect losses and betrayal by the market. Because risk cannot be eliminated from trading, the inability to tolerate risk works against you. It makes you late in pulling the trigger (waiting for confirmation) or makes it impossible to stay in a good trade and let winners run.
To trade successfully, you need to reduce fear to a level where it is healthy, i.e. you respect the reality of risk, but your judgment and behavior are not impaired by fear. To eliminate self-sabotage, you have to reduce your fear to manageable levels. You can’t trade well with a scared brain.
How I Overcame my Fear to Take Trades
Once I realized the problem I had to think of ways to train my brain to have a trader’s mentality. The first obstacle I faced was the confidence in my ability to identify a setup, plan, and execute a successful trade. My confidence was shot because of what I explained a little earlier. My emotions kept associating the painful experiences when I wanted to enter a trade. I had suffered some losses and had lost over 1/2 of my account. I started believing that I really didn’t know what I was doing, which I didn’t. So my first step was to become educated. I picked 1 strategy to learn, which was the ABCD long setup. (This setup has long since stopped working) I learned and I practiced using the On-Demand feature on the TOS platform. I practiced making a trading plan by establishing entry and exits and using position sizing to establish the correct risk/reward. Once my education was complete I was ready to move on to the next step.
I then had to convince myself that losing was OK. That taking losses occasionally was part of the business and there was no way around it. It was even more difficult convincing myself because my account was so small. A few small losses and I would have been done. This is the 2nd largest reason most new traders fail or quit. The ones that are smart enough to get the education often only have a little money left to fund an account so mentally it is very difficult to accept losses. Human nature makes you want to protect the little capital you have
I had to look at it this way. I give myself about $150 a week for gas, food, and personal incidentals. I would play the lottery every week spending $50 to $75 a week. I figured that If I’m willing to throw that money away for a million to 1 chance of making any decent money and I was OK with it, then I should be OK risking $50 in a trade to make $100 on something that I have a better than average of coming out a winner. In the lottery I had no control over whether I won or not outside of picking the numbers or the scratch-off and buying the tickets. On a trade I had a lot more control over the entry and the outcome of the trade. The lottery was a gamble, the trade was an investment.
With that I didn’t have much trouble entering trades but then another problem surfaced. When I was in the trade I was a nervous wreck. I would consistently take the trade off as soon as I made over $25 if the price action slowed down. I didn’t use the exit strategy I had. I found myself watching my P&L. If I was up $40 or $50 and I saw my unrealized gains dropping I immediately sold. I began to hide my P&L and traded the chart and tried to stick to my plan. Some I did well and some I still got scared when I saw too many red candles print and I took it off early. What helped me get better with letting my trades work was studying the charts of my trades every night and seeing how my plan worked but I didn’t trade it correctly. I guess the only good thing that happened during this time was that I was sticking to my stops and not letting losing trades get out of hand.
This is how I programmed my mind to become a better trader.
1. I got educated. Even being an educator I sometimes forget the value of education and how important it is to have someone help you organize the information so that it makes sense.
2. I learned and became proficient with 1 setup at a time. This helped my confidence as well.
3. Practice trading. I admit I practiced with my money more than I should have at first but once I learned how to use the on-demand feature on TOS I began practicing trades at nights and on weekends. The more I practiced the more entering and letting trades work become automatic
4. I used small position sizing at first to reduce the effect of my emotions. I was more inclined to let a 100 share position size have the room it needed to work. I was able to stick to my plan and let my winners run. I had to in order to make $ with a 100 share position!
5. I hid my unrealized gains so that I couldn’t see whether I was up or down on a trade. This also helped to keep my emotions in check and focus on the trade.
6. I never traded alone. I needed to be a part of a community that trades my setups because when I was new, and even today, I need support throughout the trading day. I could always ask a question to a moderator in chat when I felt lost. I found that at Warrior Trading.
7. I found a mentor to give me in depth individualized instruction and feedback. Again I wanted someone who trades the same setups and has the same trading ideology that I have. Also found that at Warrior Trading
8. I stopped watching my TweetDeck and chat trying to catch every move. Just because there are people on Twitter and in chat calling out trades all day doesn’t mean I’m not looking at the right stocks. I just stuck to my scans and my setup. Besides, 80% of what’s called out is BS anyway from people who aren’t even taking real trades.
Once you have your education out the way, the key is staying small until you are ready. There is no shame in making $50 a day to start with on 100 share positions when you are trading the entire move. Slowly increase your share size and risk making sure you are completely comfortable at every step letting the trade work. That is what I did. Stick to your stops. 1 missed stop can destroy months of hard work. Remember, no one is perfect. You will make mistakes. I make mistakes. But if you stay disciplined and trade within yourself, you will make it. You will minimize the effects of your mistakes. Work with a proven guru and community. One that fits your style of trading. Everyone knows I have found mine and how it has improved my trading. I know now what they mean by “this is a marathon, not a sprint”.
How I Overcame my Fear of Trading was written by Ed Martin
AKA: The Average Joe Trader
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