How to overcome the fear of trading

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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

How to Overcome Your Fears in Trading?

Last Updated on July 26, 2020

Do you hesitate to place a trade after losing 5 in a row?

Do you fear that your account will eventually blow up?

Most brokers and marketers want you to think that trading is easy. You click buy, the price goes higher, and you sell. Profit.

Your fears in trading are one of the biggest hurdles to overcome. In this post, I share with you the 5 biggest trading fears that destroy most traders, and how you can avoid it.

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What is fear?

A distressing emotion aroused by impending danger, evil, pain etc . whether the threat is real or imagined; the feeling or condition of being afraid. Dictionary.com

The key is whether the threat is real or imagined. In trading, the threat is often imagined and leads you to make sub-optimal decisions.

There are 5 different kinds of fear that arise when trading, and you would encounter them at one point or another. But as you grow as a trader, you realize these fears can be embraced and fear is what will propel you forward.

So, what are these 5 trading fears?

Fear of the unknown

When you don’t know how much you can lose, you are gambling. You are subjected to the unknown forces of the market when price goes against you, leaving you paralyze and helpless.

You don’t know if price will go back in your favor, and the only thing you do is hope. This is the fear of the unknown and is due to the lack of a proper trading education.

No surprise that new traders will likely encounter the fear of the unknown because the picture is painted bright and rosy, till reality sinks in.

Most are attracted to trading because of the freedom it can bring and the near-zero physical work involved, just a click of the mouse. However, what goes behind the scene is seldom talked about and much less publicized.

So, how do you overcome it?

The best way to overcome the fear of the unknown is to understand what trading is all about. You can expand your knowledge by reading good trading books and taking up trading courses.

Fear of being wrong

Our educational system is rooted in the construct of right and wrong. We are rewarded for what are deemed to be correct answers and the ensuing higher grades, which generally lead to more successful lives. Being right affirms and inflates our sense of self-worth. As students we learn to avoid as best we can the embarrassment of being wrong. Getting the right answer becomes the primary purpose of our education. Isn’t it regrettable that this may be inconsistent with actually learning? – Mel Schwartz

In short, human beings are culturally wired wanting to be right. We simply hate being wrong and will do whatever it takes just to defend ourselves.

But translate that into trading what do you get?

A trader who wants to win all the time at the expense of trading without a stop loss, and you know what happens in the end.

What can you learn from it?

You can be right 70% of the time and still lose money because your losses are much larger than your wins. E.g. Each winning trade makes you $1 and losing trade cost you $3. Assuming you win 7 trades and lose 3, netting you -$2 .

Likewise, you can be right 30% of the time and still make money because your wins are much larger than your losses. E.g. Each winning trade makes you $3 and losing trade cost you $1. Assuming you win 3 trades and lose 7, netting you $2 .

Remember, there is zero correlation between your winning % and your profitability.

Likewise, there is zero correlation between your IQ and your success as a trader.

I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren’t. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional make-up is more important – William Eckhardt

Fear of missing out

Imagine you have been eyeing a new pair of sleek leather shoes for the longest time. One day you notice it is on sale but only for a limited time. What would you do?

I can almost guarantee you will rush to buy that pair of leather shoes without a second thought. After all, there isn’t anything to lose besides the money required to buy the shoes.

Why did you do it? Because the fear of missing out is so great that you quickly pounce onto the opportunity lest it gets away.

However, when you translate the fear of missing out into trading, that’s when things could get ugly.

Let’s say you had a plan to long at support because you notice price has been respecting it over the last few weeks. Unfortunately, you missed that trade and now price has rallied higher without you.

To avoid the fear of missing out, you went long at a much higher price which is usually when the market starts to turn.

So what can you do about it?

If you know your trading setups in advance, use limit or stop orders to get you into the trade.

For some reason should you miss your trading setup, simply let it go. There’s no point in chasing the market further and breaking your own trading rules, only to regret it later on.

Bear in mind that you cannot catch all moves in the market. Depending on your trading approach, some market conditions will be favorable to you, and some will not.

E.g. Trend follower is expected to capture trends in the market. Thus it does not make sense to have the fear of missing out at tops and bottoms in the market.

Fear of losses

Loss aversion refers to the tendency for people to prefer avoiding losses than acquiring gains. Studies by Amos Tversky and Daniel Kahneman suggest that losses are twice as psychologically powerful as gains.

This means that human beings are afraid of losing and would do whatever it takes to avoid losses. However, by avoiding losses it leads to decisions that are detrimental to your trading.

Failure to cut losses – When you are afraid to take a loss, you hesitate to cut your trades because you rather see a paper loss than a realized loss. And this eventually results in blowing up your trading account. (one of the reasons why human beings are not cut out for trading)

Hesitate to pull the trigger – When the fear of losses gets out of control, you hesitate in executing your trades when the time comes. The fear is always at the back of your head causing you to freeze like a deer in headlights. And this eventually causes you to miss profitable trades that could make up for the losses.

And if these isn’t enough, the fear of losses also leads to another problem. The fear of giving back profits.

So how do you handle the fear of losses?

1. Trade with money you can afford to lose (not money that is required to pay the bills)

2. Risk no more than 1% on each trade (you can lose 10 times in a row and the draw down is still manageable)

3. Understand that trading is dealing with probabilities never certainties (only death and taxes are certain)

If you can’t take a small loss, sooner or later you will take the mother of all losses – Ed Seykota

Fear of giving back profits

One of the biggest psychological hurdle a trader face is the fear of giving back profits. But how does it come about?

Let’s be honest, you enter the trading business because you thought it is easy, and do not know what you are actually getting into. Thus it is a norm for you to lose money during the initial stages of your trading. So what do you do?

Whenever you have a small profit in a trade, you do whatever it takes to protect it, fearing that it may turn into a loss. Otherwise known as the fear of giving back profits.

This is a function of how much you have lost in the past. The more you lost the greater your fear of giving back profits, and this vicious cycle repeats.

Looking at the example below you will see how a positive expectancy model is ruined by the fear of giving back profits.

Assume you have a 50% chance of making $10 for every $5 risk, and your next 7 trades look like this

If you allowed the math to play out you would have netted a gain of $10 . (- 20 + 30 )

However, you closed your trades whenever you saw a gain of $5 because of the fear of giving back profits.

This result in a net loss of $5 . (- 20 + 15 )

Now how do you overcome this?

Develop a trading plan that has clearly defined entries and exits, and follow your plan. By having a clearly defined plan, you will be more objective in your trading instead of trading based on emotions.

Conclusion

As a human being, it is normal to have fears in trading. But whether it cripples you or push you to new heights is entirely dependent on you.

I hope these solutions will help you deal with your fears and push your trading to new heights.

So how do you overcome your fears in trading?

Do you know the 5 Secrets of trend following that makes it profitable over the last 200 years? In my FREE trading course (valued at $48), I reveal to you what are the 5 secrets, and how it can improve your trading immediately.

4 Trading Fears and How to Overcome Them

08/25/2020 9:15 am EST

Focus: TRADING

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.

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.

Conclusion
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.

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