Friday, September 18, 2015

How to Embrace Your Fear in Trading: The Trading Intelligentsia Has it Wrong


Most trader's and coaches think of emotion as if it is trading kryptonite. The worst of these emotions is thought to be fear.

If you Google "fear" and "trading" you will see a host of "how to overcome fear in trading" articles. No disrespect to those authors, but they are worthless. Don't read them. Every one of these articles misses the point.

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Fear in trading is a good thing. It is an emotion that is telling you something. To a trader it is warning that "something is wrong here. Past experience and pattern recognition is a signal that I need to adapt my strategy." 

Why would you want to overcome this legitimate warning signal? Ignoring your emotion and sticking with the plan is a likely bad move. Rather than overcoming this vital emotion, embrace your fear and investigate why the sirens are going off in your head.

The 3 Step Process Embracing Fear

When fear grips me during a trade, I analyze the situation using a  3 step process:

  1. I ask myself why I am scared. I review the setup, patterns, risk parameters, position sizing and market conditions. If something has fundamentally changed in any of these factors, I reassess the trade. 
  2. If I can't find anything wrong with the trade, I think back to the last time few times I felt this way. Was there a common theme. Did something significant happen in those trades, or was my fear ultimately misguided?
  3. If I still can't come up with anything, I look inward. This is where self actualization comes into play. I try to take a step back and "watch the watcher". Is this emotion based on flawed perceptions? Are there factors outside trading making me feel this way? Am I focusing too much on recent profits and losses rather than the trade? 

If my perceptions are flawed or the fear is based on my own mental anxiety rather than a change in trade conditions, I make no trade adjustment and come up with a plan to work on myself.

After this three stop process, a plan is in place to fix the trade or the trader. By doing so, I end up becoming a better trader. This is accomplished not by overcoming my fear, but by embracing it. 



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4 comments:

best stocks to day trade said...

Your post is interesting. I feel it is important to instill in customers a sense of responsibility since we need people to strive for greatness, awareness leading to influence.

michelle said...

I like this. Thanks lots. Will build these questions into my daily trading plan. Much appreciated Paul.

Amy said...

Paul,
Your straight forward,plain talk, is on point. Trading must encompass emotion. Keep up the great posts. Great food for thought.

Aditya Chopra said...

Hi Paul,

This is the most systematic way to address fear, I tried a few times and it actually makes me being comfortable with the consequences of the trade. Thanks