By Rob Colville on April 30, 2014 in
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?
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.
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.
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.
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.
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.