Thursday, February 19, 2015

Fear and Trading

I have learned over the years that when one's mind is made up, this diminishes fear; knowing what must be done does away with fear.
Rosa Parks

Fear is an emotion that signals impending doom. When our human psyche perceives a threat, both our psychological as well as physical assets are activated. Fear is instinctive and is related to the fight-or-flee response. It's a very basic response that animals use to survive in the wild and it's controlled by very primitive parts of the brain. When harm is perceived, a wild animal must mobilize resources and make a quick decision to either fight the opponent or flee to safety. Fear again is instinctive. If left unchecked, it can sabotage even the most foolproof trading plan. But seasoned traders rarely act on their fear. Through experience, they've learned to control it. And through practice and concerted effort, you can too, if controlling fear is an issue for you. 

There are a few key strategies you can use that will effectively control your fear. It's very difficult to control fear when you have a great deal of money on the line. That's why most successful traders tend to risk relatively small amounts of capital on any single trade, and they have clearly defined exit strategies. Putting less money on the line with each trade is one effective way to decrease fear of losing money. It is also important to trade with money you can afford to lose. If you trade with money that you need to pay basic expenses (i.e. betting the mortgage money), you will have a valid reason for fearing a loss. It will then be
difficult to fool yourself, so don't bother trying. If you can't afford to lose your stake, build up your account balance and stand aside until you can calmly put a trade on without concerning yourself with the adverse consequences of a possible loss.

Some people were taught as children to hide their fear, to pretend that they were courageous in the face of adversity. But trying to hide your fear often makes it even more difficult to control. It's better to just admit that you are afraid, and admit that there is, indeed, a good chance that you will lose money on your trade. You'll find that once you admit the possibility of loss, you'll feel much better, and control fear more easily. In his book, "Trading to Win," Dr. Ari Kiev offers a quick and sometimes effective way of controlling fear: "Acknowledge you are afraid and the feeling will pass. Refuse to acknowledge fear and it will perpetuate. So admit you are afraid and the fear will disperse."

From the PrudentTrader archives 2004

No comments: