Saturday, January 11, 2014

Psychology Edge Of Trading Fear

Fear, Feelings of Inadequacy - Lack of Courage or Self-Confidence

Fear is prob­a­bly the most sig­nif­i­cant emo­tion for traders. Many traders strug­gle with this emo­tion and fear can demo­bi­lize you from apply­ing your hard learned tech­ni­cal skills.  Sig­nif­i­cant trad­ing losses often lead to emo­tional dis­tress and tur­moil. Unless addressed, the trader may re-experience those painful mem­o­ries in future trades. 

Fol­low­ing anguish­ing losses, a trader may become par­a­lyzed and unable to enter the trade or act in other fear-based ways. After all, traders are human and nat­u­rally fear that which causes pain. Although the desire to trade may be strong, the men­tal response to fear can be stronger. Antic­i­pated pain is side­stepped by not pulling the trig­ger. This is not a sign of weak­ness. It is merely the mind’s attempt at self-protection, though it causes much frus­tra­tion and dis­tress, and works against our inter­ests as traders. 

In day trading, the main fear a trader has is that they are going to make a losing trade and lose money. This is a rational fear as no trader wants to lose money, but it is irrational if it prevents the trader from taking any trades in the first place. As an example, a trader might make a losing trade, and then be too fearful to make the next trade, which of course turns out to be a winning trade, and would have covered the previous loss. 

By letting the fear take control, the trader now has a net loss, even though a winning trade was available. The emotion of fear can be overcome by acknowledging that all day traders have losing trades occasionally, but as long as they are less frequent than the winning trades, there is nothing to be afraid of as there will still be a net profit.

When suf­fer­ing from fear, you may
i) Cut win­ners short in fear of giv­ing prof­its back 
ii) Hes­i­tate in pulling the trig­ger because you fear the prospects of a loss
iii) Hang on to los­ing trades because you fear tak­ing the loss
iv) Jump into unplanned trades because you fear leav­ing money on the table

There are many types of fear that can plague traders
i) The fear of missing a trade
ii) The fear of losing money
iii) The fear of being wrong
iv) The fear of losing face with peers
v) The fear of criticism

There are more than just the ones shown above.  What can you do about fear?  What steps can you take to overcome it?

The possible causes of anxiety and fear are many: conflict, health problems, dangerous situations, death, unmet needs, spiritual problems, false beliefs, lack of self-confidence, lack of faith in the way you have chosen to trade, etc.; but for traders, it is the action of price movement that brings about the greatest amount of anxiety and fear.

We need to create a consistent routine that will enable us to execute our trades according to plan, and without hesitation even after experiencing a string of losing trades. Trading is a business of following rules.
How do you manage your Personal Risk? Below are the 10 points I feel it is important!

PlanningI believe the most important single factor in eliminating fear in trading is for a trader to define and operate from a well-thought out trading plan.  If you are not following your plan or if you don’t have one you will experience the horrors of the market the end result of which will be fear.

Trade With a Clear MindDo not make emotional decisions. Realize that emotions are emotions. What differentiates the successful traders from others is how we recalibrate our reactions to our emotions.

I was watching an interview with a surfer. The interviewer asked him what he does when a big surf comes and he goes underwater. The surfer said it was simple. “If I panic, I only have 3-5 seconds of air to breathe. If I stay calm, I have 45-60 seconds of air.“

What does surfing have to do with trading? If you panic and operate from a place of fear, you could lose all of your capital. However, if you take a moment and think about your strategies, you can have much better results.

Limit Your Input. There are a lot of conflicting points of view. If we want to listen to all of them, it becomes very confusing, and the confused mind does not make a decision. Instead of listening to everybody, pick the top 3 people that you respect and listen to them. This way, you can remain focused and have much better trading results.

Be In Tune With the Markets. Trade the markets as they are and not as you want them to be.
If we are not in tune with the markets and don’t listen to them, we are going to be in a losing game. After all, hope is a lousy hedge.

Quick exits when wrong.  You should have a clear idea in mind of what you expect from price action upon entry into a trade.  If you don’t soon see what you were anticipating exit the trade. Never trade when there is any doubt in your mind.

Use a time stop. Hand in hand with “when in doubt don’t trade,” is the use of a time stop.  If your trade fails to meet your objectives within a certain period of time, exit the trade - win or lose.  There are two ways to be wrong in a trade.  The most thought of way is that of being wrong about direction.  But what about being wrong in your timing?  Doesn’t that count as equally important?  How many times have you been in a trade, been stopped out with a loss, only to see the trade then move strongly the way you originally anticipated?  You were correct about the direction. You were wrong about the timing.

Don’t overtrade.  Don’t overtrade your capital and don’t overtrade your time.  Trading too big risking more than you should leads to losses and fear.  Trading too often does the same thing. No one forces you to trade all the time.  Never feel you must trade and never feel you must trade all day.  Trading that way borders on addiction.

Keep your focus. Fear limits your focus, and this is particularly true in trading. One of the great ironies of fear is that we tend to bring the very thing we fear upon ourselves. Thoughts can create reality; thoughts charged with an emotion such as fear can realize the dreaded possibility with an amazing speed and effectiveness. What happens if you fear loss when you're trading? You’ve got it! You lose.

Study the markets. Studying the markets will eventually bring understanding. Understanding will, in turn, bring success. Success will bring rewards, and suddenly the market will be to you what it actually is: an impersonal arena in which those with understanding get paid to trade. With understanding, you will trade wisely. With understanding, you will see how simple trading can actually be. With understanding, you will garner money from the markets. With the successes you have in the marketplace, you will develop the courage of your convictions. Because trading will give you pleasant experiences, rather than fear. 

You won’t win every trade.  The problem of fear is made much worse if you enter every trade with the "expectation" that it should be profitable.  Be aware! After several winning trades, the feeling of invincibility supersedes being logical. This can lead you ignore a successful strategy and into trades that you normally would not have entered. Finding good trades is "only" accomplished by sticking to a proven plan. But finding poor trades, and ignoring your trading plan, seems to get much easier after a couple of winners. Never mistake genius for profits derived from your trading strategy. Genius loses money. Trading plans make money.

--Trading Market & Educator

1 comment:

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