Do you lay awake at night terrified about placing your next trade?
Are you always trading in fear that your account is going to blow up overnight when you carry positions in the markets?
I know that feeling all too well… it really is paralyzing.
Many brokers want you to feel secure… that trading is easy…
You click buy, and then the price goes higher, and you hit sell.
What great profits!
But in reality this is far from the truth!
Many traders sit paralyzed in fear of losing money.
Unfortunately, some traders are forced to leave the industry all together if they take a big loss that they cannot recover from.
Fear is truly destroying and your fears in trading are some of the biggest hurdles you will have to overcome.
In this post I will share with you some of the biggest trading fears that destroy traders and exactly how you can avoid this from happening to you.
Fear definition: Is an unpleasant emotion or thought that you have when you are frightened or worried by something whether the threat is real or imagined. – Cambridge dictionary
The key to this is real or imagined.
In trading, the threat is often imagined and leads you to make poor decisions.
There are 5 kinds of fear that happen while trading and as a trader you are going to encounter them at some point in your career.
As you grow as a trader you then realize that fears can be embraced and fear is what gives you the fuel to continue forward.
But first, you must master understanding and controlling that fear before you can harness the power to your advantage.
The 5 kinds of fear are:
- Fear of known and unknown
- Fear of being right or wrong
- Fear of missing out (FOMO)
- Fear of losses
- Fear of giving back profits
Fear of known and unknown
If you are not disciplined in your trading you lose track of how much you can lose in a trade… and this is gambling not trading.
You are putting your account in danger of unknown forces in the markets and excess levels of risk in your trade can leave you paralzed and helpless.
Why does this happen?
Well, how do you know that price will go back in your favor? So all you do is hope that it does.
This is the fear of the unknown and is due to the lack of proper trading education.
To no surprise, many new traders will encounter the fear of the unknown because the picture is painted bright and rosy until reality sets in. This usually happens when large trades are placed for the first time.
Many are attracted to the industry because of the dreams of financial freedom it can bring to the trader. Unfortunately, the risks of trading are never really spoken about and take a new trader by surprise.
So, how do you overcome it?
The best way to overcome the fear of the unknown and known is to understand what trading is all about. You can expand your knowledge by reading trading books and taking courses to help boost your confidence.
Fear of being right or wrong
From the first day of school as a kid, you are taught what is right and wrong.
You are rewarded for being right, and punished for being wrong.
This punishment for being wrong teaches us to avoid the best we can the embarrassment of being wrong.
Understanding how to achieve the right answer becomes the primary purpose of education, and this is no different in trading.
Basically, humans are trained to desire to be correct, and simply hate being wrong. And humans will do whatever it takes to defend themselves, including make up facts to prove them right.
Translate this into trading and what do you get?
A trader who fears being wrong, and will make bad decisions to prove they are correct.
Many times a trader who has the desire to win will trade without using stop losses, and I am sure you know how that usually ends.
Let’s see how this looks on a short trade at resistance without stop losses on the SPY.
As you can see in this image above, a trader going short at resistance without a stop order will suffer significant losses.
Once losses are starting to stack up, exit levels are harder to locate and typically results in “hold on tight and pray for the best”.
And that is one of the worst types of strategies!
Did you know that with poor risk management even being right 70% of the time can lead to serious losses on your account.
That’s why proper trade sizes and properly calculated stop losses are essential to profitability as a trader.
Fear of missing out (FOMO)
Imagine that you are eying the perfect stock and it just continues to go higher and higher.
It’s human nature to feel sad when left out of events. And that’s ok!
But it’s deadly when it happens when you are trading.
Let’s take a look at how FOMO can land you in a bad trade.
As you can see, you wanted to get into the stock initially at a great price but ended up missing it.
And as you watched it heading higher without you, FOMO finally got advantage of you and you ended up going long at the very top. Then shortly after you would take losses right after as the stock fell back down.
This is how FOMO can make you place bad trades and force you to trade with emotion.
Lesson is, for some reason if you miss your trading setup, just simply let it go. There is no point in chasing the market further and breaking your trading rules.
Solution to FOMO: Try to place limit orders to enter the trade in advance so you don’t chase the price higher.
Fear of losses
Once you take your first major loss when trading you will understand how much pain this causes.
When you are first starting trading it’s important to make sure you take smaller losses to keep trama low.
It’s also human nature to be afraid of losing and would do whatever it takes to avoid losses. However, being too adverse to risk will prevent you from even trading and is detrimental to your profits.
There are two major fears of losses:
- Fear to cut losses
- Fear to pull the trigger
Failure to cut losses: When you are afraid to take a loss you hesitate to cut your trade because you are hoping that it will come back to your price level or go in your favor for a profit.
Realizing a loss can make you feel defeated and emotions will start to get impacted if you take too many losses in a row.
This will eventually lead to blowing up your trading account as traders just continue to hold losers as they continue to just keep going lower.
Hesitate to pull the trigger: When fear of losses gets out of control a trader will hesitate in pulling the trigger on a new trade.
This fear never goes away…and it’s always in the back of your head as you place your trade and will make you freeze up like a deer in a spotlight. This will cause you to miss profitable trades and never offset the losses from past trades.
How to handle the fear of losses
In order to overcome the fear of losses, it’s important to follow these basic steps.
- Always make sure you trade with money you can afford to lose. Do not trade with money that is required to pay the bills every month
- Risk no more than a predetermined amount per trade. Do not exceed this to “make back losses” from prior trades.
- Understand that trading is dealing with probabilities and is never a certainty. Trading losses will always occur
Fear of giving back profits
One of the biggest physiological hurdles a trader has to overcome is the fear of giving back profits from a prior trade.
Let’s be honest, if you are at the casino and strike it big at blackjack, the worst feeling in the world is giving back all of your hard earned winnings.
And it is no different when trading.
This will cause you to take a bunch of small profits in trades and cut all your winners early preventing your big winners from manifesting.
Why do you do this?
Because you are paralzyed by the fear of giving back profits.
So how do you overcome this?
It’s important to develop a strategy and plan that clearly defines entry and exits for your trades. By having a clearly defined plan you will be more objective in your trading instead of trying to trade based on emotions.
How to conquer your fears
Conquering fears is one of the most challenging obstacles a trader must learn to face early in their career.
So what happens if you find yourself in a bad trade? Don’t panic and exit your trade immediately. It’s better to cut your losses and start over fresh instead of letting a single bad trade bankrupt your account.
Some ways to calm your fears when trading:
- The fear of the unknown – Expand your trading knowledge by continuously learning
- The fear of being wrong – Being right and being profitable don’t go hand-in-hand.
- The fear of missing out – Use limit orders to keep you from chasing the stock higher
- The fear of losses – Make sure you trade with money you can afford to lose. Do not risk more than a set amount of your total capital.
- The fear of giving back profits – Develop a trading plan and stick to it
We are all human – and it’s natural to have fears of losing. But the last thing you want is to let it cripple you or push you to levels you are uncomfortable trading at.
To become a professional trader it’s essential to understand your fears and come up with a plan to control them if an unforeseen event occurs.
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