The 4 Trading Fears (and how to conquer them)

Most traders think they know what is going to happen next. This causes them to put too much weight on the outcome of the current trade and forget to assess their performance as a probability game that they are playing over time (imagine focusing on your results after 100 trades instead of after just 1). Too much focus on the current trade puts extra weight on it like an exponential moving average instead of a simple moving average. Trading results are not an exponential moving average, all of your past trades matter — remember the 100 trades mentality.

There are two major emotions in trading: fear and greed. Warren Buffett is often quoted for “Be fearful when others are greedy and be greedy when others are fearful.” These forces constantly battle each other in the individual trader and the market as a whole as bulls fight against bears. Too much greed leads to euphoria and a lack of sensible judgment of what is going on in the market. Too much fear leads to dysphoria and a lack of control over trades and capital as depression often leads to harm-seeking behavior rather than mitigating the pain.

Fear of Losing

Effects:

• Makes trader hesitant when entering or exiting. Causes an inability to pull the trigger when needed.

• Can lead to bigger losses or missed profits.

Solutions:

• Create a trade plan before entering a trade, ensure it has edge, a high probability of winning, and a good reward:risk ratio — then pull the trigger based on these numbers rather than emotions.

• Let success mean sticking to your plan rather than making profits (you can always tweak your strategy later to lead to more profits, but you won’t get profits even on the best plan if you can’t stick to it).

• Know that losses are part of the game. The best traders have tons of losses. What separates them from the rest is their ability to manage a loss and continue without being affected.

Fear of Missing Out

Effects:

• Putting rules and trade plan aside just to get in a trade.

• Taking any price to get in a trend just to get in, even if the price is not a good value.

• Skeptics covert to fans of a trend to avoid missing out on profits or taking too big of losses betting against that trend.

• All of these cause blindness to the RISK of a trade (taking trades without knowing the risk is a guaranteed loss in the long run).

Solutions:

• Only trade when you have clear edge and clear reward:risk

• Stick to your tested strategies — just because a wave is perfect doesn’t mean you can surf it if you don’t know how to surf!

Fear of Letting a Profit Turn Into a Loss

Effects:

• Taking profits too soon and cutting your trade too short just to secure a win and not end up with a loss — great traders know the difference of opportunity cost between a losing trade and cutting a win off too soon

• Wanting to feel like a winner rather than be a winner. These traders feel like getting any green number out of a trade is a good outcome, when in reality they will never break even this way. You must make big wins and small losses to come out on top as a trader. Small wins won’t get you anywhere.

Solutions:

• If you are for or against a trend, stick with the trade until the trend confirms it changes (this ensure you squeeze the most out of the move and have quantifiable evidence to get out of the trade).

• Understand that the market will give many “false starts” and sideways moved, but once a real trend begins, it often goes much further than anyone expects. You only become a winner by riding this real trend all the way, not by getting chopped up by the false moves.

• Remember the 100 trade concept — the goal is to be profitable in 100 trades, not in 1 trade. A small win can be wiped out by a small loss (and you will always take small losses when trading). After 100 trades of this small movement up and down, you will end up breakeven or slightly down from bad fills and fees. The only way to be green after 100 trades is to make big wins because those won’t be canceled out by the small losses.

Fear of Not Being Right

Effects:

• Caring too much about being right about an analysis leads to a trader forgetting that trading is a probability game. Which again puts too much focus on the present trade instead of the 100 trades.

• Ego becomes inflated when you are “right” to a point of overconfidence which leads to taking on too much risk and feeling invulnerable — this can lead to huge losses as you are caught in a losing trade thinking that you are the trader who is always “right.” So you hold onto the trade to wait until it goes back to you being “right” again — but it ends up becoming a big loss or blowing your account.

• Form a bad habit of thinking right vs. wrong instead of good vs. bad. There is no being “right” in trading because there is never one right answer. There are infinite opportunities at any given moment in the market, so taking one opportunity isn’t wrong just because it doesn’t make a profit — it could have still been a good trade that just didn’t work out. On the other hand, if you take a bad trade and lose money, then you can learn from this and move forward without caring about being “right or wrong.”

• Prevents the trader from growth and learning because they only gather information for when they think they are “right” and ignore the information they get when they think they are “wrong” because they believe they already know why they were wrong.

Solution:

• Instead of “right or wrong,” try focusing on whether you trading “good or bad.” Good trading means sticking to your tested strategies, sticking to your plan, trading without emotion, and maintaining a balanced trade mentality.

• Let your ego go before trading. When you sit at your desk to trade, be aware of how your ego is trying to maintain your image of yourself. Let this go to give yourself room when trading to make mistakes and still maintain a balanced trading mentality to help limit losses and maximize profits.

• Stop being a perfectionist. The best traders in the world take losses consistently, but what sets them apart from the rest is their ability to manage these losses and continue trading without any effect.

• Set a goal to constantly improve instead of to always be “right.” Even if you make some bad trades, as long as you are learning from them and improving, you are going in the right direction.

The goal of managing fear is to balance it with an appropriate amount of greed in the form of confidence. Believe that if you trade well with a great strategy and always stick to your rules, you should come out profitable in the long-run. But also balance that confidence with knowing that the market doesn’t “owe” you anything and is simply an endless steam of information. It doesn’t care about you or what you think you “deserve.” Your job is to observe this stream of information and pluck trades out of it with a high probability of giving you enough profit to cover your inevitable losses.