Fear in trading

How do you define fear?

"A strong emotion caused by anticipation or awareness of danger, it implies anxiety and usually the loss of courage." This definition of fear is useful in helping define the issues that traders face when coping with fear. The reality is that all traders feel fear at some level, but the key is how we prepare to address our concerns related to taking on risk as a trader.

Mark Douglas, in his book, ‘Trading in the Zone’, says that 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 too high and too low and causes them to react emotionally, with excessive fear or greed after a series of losses or wins.

All traders will encounter fear at some stage, no matter whether you are a professional or a novice trader, this seems inevitable, and to succeed and fight fear, traders will have to work through this positively. Winning traders manage their fear, while losers are controlled by it. Winners take positive action in spite of their fears.

Two of the greatest fears that a trader will encounter can be,
1. Fear of Loss
2. Fear of letting a profit turn into a loss

Fear of a Loss

No matter how skilled you may be in your technical analysis, or your study of fundament and analysis, or your having devised some brilliant trading strategies – but you may still face roadblocks on becoming a successful and a profitable trader. Why? – Overcoming fear of losing money. I have never met a trader who really likes losing money – at the same time I have never come across any trader who has NEVER lost any money. I know of one leading “guru” on charts and technical analysis in UK, who regularly lectures at seminars, once admitted that despite being brilliant in his study of technical analysis, he has failed miserably in his trading, having blown his account many times – now he just concentrates on teaching trading to others!

Fear of losing is not a problem, but it is how you handle the loss. A trader, who is relaxed, can look forward to another trade. Your success or failure in trading depends on your attitudes towards your gain as well as losses – and how you handle them.
The market does not know that you, the traders exists, you or for that matter any trader cannot do anything to change the market or influence it. Only YOU can control your behavior.

Whether it is a big drawdown on an account, or a good profitable trade, a professional trade ruse his head to stay calm and will look for his new trade. Only a novice trader will become excited and depressed. You are simply wasting your precious nervous energy!
The primary difference between a professional trader and a novice trader is how they handle a loss.
One of the greatest reasons for a lack of success in trading is because most traders played it safe, they are so afraid of losing that they simply do not pull the trigger, even when they have a great trade!, winning means being unafraid to lose.fearImagine how many times did you fall down, before you finally learnt to ride a bike? Or how many times did the baby fall down before the child went from crawling to walking to running?

So for most novice traders, the reason they do not win in their trading is because the pain of losing money is far greater than the joy of being a winning trader, on the other hand losing inspires a professional trader, for he will look at that as a way to learn from that loss and he will always ask the question, how can I profit the next time?
The winning trader will have a trading journal, where he records his trade; he will pull out the chart, and study it carefully, why the trade made a loss. A professional Trader is more concerned about avoiding a big loss and less concerned about small losses.

One trader that I had recently coached had an overall winning trade of 80%, yet his overall monetary record is of having a massive loss. He likes trading stock futures, particularly the stock Google, had many, many successful trades on the long side, but finally he went short at $179 and at the time of writing this book, he was still short with the price at $198. He had many opportunities to come out with a small loss, but “he did not want to take a loss”.

This position has stopped him focusing on new opportunities.
The longer you can stay in the game with a sound trading plan, the more likely you will start to experience a better run of trades that will always serve you well in times of temporary trading slumps. Being a cricket follower, I see that even a world-class cricketer goes through a lean patch, be it Botham, Tendulkar or Richards – But they all come back with a bang, so it should not be different for a trader.

What is important is how well you execute your trading plan, and stay focused with ruthless discipline. With a good trading plan you should be able to have an entry and exit strategies, which you will action decisively and not hesitantly.

Fear of letting a profit turn into a loss

I am often asked when I take my profit. - I simply say, “Go with the trend! – Let the profits run, and cut the losses short” But what do most Traders do? They SNATCH PROFITS and let the losses run! Too many traders want to lock in a quick profit to guarantee that they feel like a winner.

So when do you take profits? For example I tend to break my trade into 2 lots, or 4 lots, depending on what time frame I am trading. So let’s say if I am trading a shorter term time frame, I break my trade in 2 lots, so that as soon as I am say 30 points in profit, I close 50% of my trade and then for the remaining, I move my stop to break even. This way I am guaranteed that I will not lose! I will let the second lot run and I am seeking to ride the position with a trailing stop on the remaining portion of the position. Quite often I get stopped out, but imagine if only 2 out 10 trades you catch are a “big move” – what would that do to your bank balance! – The key is patience.

If however, I were trading a longer-term time frame, I would break the trade in 4 parts, taking 25% profits gradually, and at the same time trying to catch the big move. This strategy has given me the most confidence.

See you in this forex trading system blog !