‘Fear’ is something that I bet every trader in the world has at some stage experienced. It could be a fear of loss (losing money), a fear of being wrong (ego), or perhaps even FOMO (Fear of missing out).
What is certain however, is that any traders who have become truly successful within trading have learnt to manage and master their fears. If you cannot do this, then you stand little chance of staying in the game long term.
So how do we combat fear?
Fear of Loss
If you haven’t already, create a trading strategy that works. This is perhaps arguably one of the most difficult aspects of trading. Not because a profitable system is rare, but rather that finding a profitable system that is compatible to YOU can be difficult to come by. There are many off the shelf trading systems, some which are very good and work well. However a trading system is not a ‘one size fits all’ product. What you really need to do, is when you have found a trading style that suits your personality (e.g. scalping, daytrading, swing, position), you need to create or obtain a trading system and personalise it to you! Remember, your mind, your thought patterns, your responses may differ to someone else, and thus even though you are using the same system, you results will vary. So once you have your system, extract all the positive elements of that system that work for you and build on that. By doing this, you will develop confidence in yourself and your system, and this will go a long way to nullifying the feeling of fear when it comes to trading, particularly fear of loss.
Risk Management – Many times, when it comes to fear of loss, there is a simple solution for this – trade a smaller size! I’ve worked with clients before who were trading within an acceptable risk parameter (e.g. 2% risk per trade) but were still struggling with pulling the trigger when everything lined up as per their rules. The first step (and in many cases the only one needed) is to simply cut your trade size down to a level where what you are risking is insignificant to you. Once you are trading at this level, you can trade more freely without worrying about the outcome. Providing you have a proven strategy (point 1) and you are disciplined enough to let it play out, you will make significant progress in terms of taking all available opportunities. Then after some time you can gradually increase your trading size back up to higher levels, and where you take gradual steps, you will still be indifferent to the outcome of any individual trade.
Fear of Missing out (FOMO)
Acknowledge that you don’t need to catch every single move! In my post a little while ago entitled ‘How small but consistent progress adds up‘ – (please check it out!), I show just how little is needed to make extraordinary returns IF you are willing to play a long term game. Unfortunately, the fact of the matter is most traders are NOT willing to put in the time. They say trading as a short term get rich quick scheme, and trust me when I tell you, I’ve been through this phase, and I most certainly did not get rich quick! When I accepted that I need to be in the game for long haul, things changed significantly and my performance improved greatly. As shown in the above mentioned blog post, even a small goal of 25 pips a week (yes, a week!) over time can give you remarkable results. The turning point for me was I actually created my own spreadsheet showing how my capital would grow when I utilised compounding over time. When you do this task yourself and play around with the figures, it’s amazing the effect it has on your mindset. Warren Buffet himself states that the single most powerful factor behind his success is compound interest. So if arguably the greatest investor of all time rates compounding that highly, why shouldn’t us traders utilise it also? See, in my younger days I always had in my mind that I wanted to make 50 pips, or 100 pips a day – and I did achieve this on many occasions. However inevitably, on days where markets where not quite as volatile, I used to force things, and inevitably lose. Then I used to gear up, and lose more. It was a vicious cycle. So understanding that even if i make, 25, 50, 100 pips a week, I could still hit all of my financial goals. All I needed to do was be patient, and be consistent.
Fear of being wrong
The fear of being wrong is a very intriguing one. Since early childhood when we start school, we are basically programmed that we need to be right. If you get an answer right, great. If not, then you got a big red cross in your book. If we got spellings right, there was no reward. But if we got them wrong, the punishment was writing lines over and over, to ‘drill’ the correct spelling home. Thus the punishment far outweighed the potential (if any) reward. On the other side of the coin, our education system is based fully on textbook learning, which is a simple of case of right or wrong. We are taught that if you study hard, get the right answers in our exams, go to university, get the right marks there, then get a good job and lead a successful life. And if we can’t do that, then we will have a tough life. I remember even as a kid when I got my exam results, I was always looking around to see who beat me and by how much, and try to save myself the embarrassment of being well below my peers. Ironically in many instances I was scoring towards the top end of my class, but that fear of being ‘wrong’ was present from an early age. It is essentially just human nature, we are wired to want to be right – After all, who wants to be wrong?
Unfortunately, within the profession of trading, you will not always be right. You WILL be wrong from time to time. You must remember that the bottom line is about how much money you can make, not how good your strike rate is.
You can potentially have a success rate of 70%, which is extremely good. However, if your risk:reward profile does not match up with your strike rate you can still lose money. For example if you make £5 every time you are right, and you lose £15 every time you are wrong, after 10 trades with a success rate of 70%, you will have made £35 but lost £45, thus net you lose £10!
Conversely, if you are right only 30% of the time, you can still make handsome money. If you make £15 every time you are right, and lose £5 when you are wrong, after 10 trades with a success rate of 30%, you will have made £45 and lost £35, thus you are profitable.
You must understand that to be a successful trader you have to accept and even embrace the fact that you will be wrong. I myself have taken massive hits whereby in an attempt to not take a loss I kept moving my stops again and again, and what was once a small loss turned into a something that caused a devastating impact not only to my equity but also to myself mentally. I have worked with traders who have experienced the exact same thing.
Embrace that you will be wrong, and just focus on being compliant in the execution of your plan. If you keep your losers small, you are already miles ahead of the crowd.
“If you can’t take a small loss, sooner or later you will take the mother of all losses”. – Ed Seykota
Lastly, remember that you cannot make fear disappear. It will always be there to an extent. All you can do is acknowledge your fear, be aware of it. Ask yourself why is the fear there? Get curious and understand the meaning behind it. Once you know this, it is a lot easier to resist and master.
“Courage is resistance to fear, mastery of fear, not absence of fear.” – Mark Twain
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