I was recently asked in an interview what I would say to a trader or investor who is fearful. That is, what would I say to help them overcome their fears and trade without fear.
There are a few different fears that many traders face at one time or another, but for this post I want to focus on one of the main fears many traders have. That is the Fear of Losing Money.
The fear of losing money can keep the Trader from pulling the trigger on a trade. This is obvious. The Trader is afraid of taking any risk, and so when an opportunity to trade or invest arises based on the trader's methodology of trading, they have a hard time putting in the order to get in the trade.
Ever had this problem? What is happening here?
Maybe you are starting to doubt your trading methodology/system. Maybe you have had a run of losing trades and you just can't bear another one. Or maybe you have 10 winners in a row and now you are getting hesitant because you think you are 'overdue' for a loss. Maybe you are trading with 'sacred' money - money you cannot afford to lose or money you need immediately to pay the bills or feed the family. There are numerous scenarios that can drive the trader/investor into paralysis when their trading methodology signals that it's time to take action.
A key point is that the same EXACT situation can drive one trader to be fearful, and another to be brave...and another to be wreckless. The TRADER is in control as to how he/she interprets the environment. What happens, happens to us all. It's how one responds that will determine what steps are made towards one's goals, or away from them.
Whatever the reason, the key solution to this fear is to RESET to ZERO. That is, assume this next trade is a brand new trade. The past is the past, and this trade should not be impacted by a previous trade or series of trades - there is no relationship between them.
The way to objectively assess the QUALITY of the trade is not if it WINS or LOSES. You must verify that this trade is to your Trading Plan and Trading Methodology.
If it is, PULL THE TRIGGER. If it is not, DON'T.
If you are not sure, DON'T pull the trigger, and study your PLAN and METHOD closer so
you can figure it out. There will be trades that fall into a 'gray' area, and those are trades that you should just stand aside and watch. Take notes. Mark the entry and the subsequent performance and go back and study it later to find out how you can get on it or why it was good you avoided it.
The other big problem with trading in a state of fear is that it can give the trader an 'itchy trigger finger' on the trades they are already in because they don't want to give back the paper profits and want to ring the register as soon as possible because they are FEARFUL - causing them to get out of their winning position too early.
For example, consider the scenario that you take a trade and based on your plan, if this trade hits the target you have established, you will make $1000.
So, you are in this trade and it's cruising along and at this moment, you are up $500. Not bad. But now the stock starts to pull back and your P&L reads that you are now up only $450...1 minute later you are up only $300...and just 1 minute after that your paper profits are now down to $100......as you sense that fear of LOSS creeping in you get nervous. If you are a FEARFUL trader you will most likely sell at the market to lock in whatever profit you can get as the stock moves back to your entry. So you may book $100 in profit or maybe you break even. The amount is not important. It's the FEAR that is.
Usually because of the fear, you are BLIND to the fact that you should be holding on or adding to your position based on all the other evidence of the market, sector, and the market internals. But due to FEAR, a trader gets so buried in that emotion that they shut off their ability to see the objective truth.
Often after this retracement back down, where the fearful trader gets out of the position and is relieved to break even or make a small profit, the stock then moves back up and hits the target where they would've made their planned $1000.
This can be very detrimental to the trader's mindset and can carry over to revenge trading and other wreckless behaviors that can empty one's account in short order.
So how do you stop this FEAR from controlling you?
MANAGE YOUR TRADES TO YOUR PLAN - put it on autopilot. If your goal is either it hits the target or you stop out, then "Set it and forget it". There are so many techniques and tactics to manage trades that you have to find what works for you and your style of trading, backtest it so you know it works, and then FOLLOW it. No questions.
The key to Success in Trading and Investing is Eradicating Fear. To Trade from a Fearless State of Mind.
Using the techniques listed above can help you trade and invest from a fearless state of mind.