Most of traders in every kind of market, feel fear at some level. But the key to successful “profitable” 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/traders 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.
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 traders 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 Trader interprets a state of arousal negatively as fear or stress, performance is likely to be impaired. A trader will tend to “freeze.”
There are two major trading fears.
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 trading strategy. This can often lead to an inability to pull the trigger on new entries as well as on new exits.
As a Trader, 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 trading strategy. This causes a lack of trust in the strategy or, more importantly, in your own ability to execute future signals.
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.
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 a 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 on board.
This fear is often fueled during runaway booms like the Harshad Mehta Bull Market or 2007 Boom Boom Cycle , as traders 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.