Every Trader’s Worst Enemy (and How to Beat It)

Fear in dictionary

Few things pack as much punch…

Words like intimidating, formidable, and debilitating describe its impact.

And many people will do almost anything to avoid it.

Do you know the foe I’m describing?

Well let me tell you…it’s none other than fear.

Of all the emotions, fear can be the most brutal. Not only could it stop you from doing what you want, it could also pull you back when you try to move forward.

Many traders struggle to control their fears. It often leaves them frozen in a state of inaction. At other times, fear causes them to panic in the face of uncertainty.

I’ve seen fear end more than a few careers over the years. How you manage this powerful emotion could have a big influence on your chances of success.

I’m going to talk more about fear and trading in a minute.

But first, I have a story about my own battle with the beast.

The crippling reality of fear

It was more than 20 years ago, yet I still wonder what could have been.

You see, I was holidaying with a couple of mates in Cairns. We’d done just about every action sport the tropical north had to offer — rafting, bungee jumping, reef diving…you name it.

Then on our second last day, we saw an ad for something we hadn’t done — skydiving.

Now, I’d been keen to do everything up until this point.

But jumping out of a plane was another thing entirely. My anxiety levels were rapidly rising.

I joked along as one of the guys made the phone call. Secretly though, I was hoping it would be too late to get a booking.

But no such luck. They had an opening for us.

Within an hour we were in the briefing room. 30 minutes later we were suiting up. And just half an hour after that, we were with the instructors beside the plane.

Things were moving fast — there was no turning back.

But fate was about to step in. The tower radioed the pilot. An approaching front was reducing visibility in the jump zone. There’d be no more skydiving for the day.

My relief was palpable. I was off the hook.

The skydiving school called us the next morning. They said the skies were clear and they were ready to take us up. But I wasn’t going back. Fear had won.

My mates pressed on. They tell me skydiving was one of their greatest experiences. Freefalling from 12,000 feet is something they’ll always remember.

Do I regret pulling out?

You bet. I let fear overwhelm me. I let fear hold me back.

How to overcome your fear as a trader

Fear is a vital emotion. It’s our brains response to potential danger. Without fear, we couldn’t protect ourselves from legitimate threats.

But fear can get out of hand. It can hold you back unnecessarily. A strategy for dealing with fear is essential if you want to do anything that involves a risk.

I have an email that I want you to read. It’s from a member whose fear of trading is overwhelming. He is at a stage where he’s ready to walk away.

This is what he says:

I’m mentally beating myself up every day. Quant trading really got my interest when I first heard of it. I read all the information and then took the chance to join. My plan was for a long-term commitment. It seemed like a natural extension to my real estate investments.

I completely get the concept. But that’s where it ends. I just can’t let the trades run, and I can’t go short. I’ve had a few goes, only to get cold feet. I just don’t have the nerve. That’s the brutal truth. And I hate owning up to it.

Member, Ian

I believe Ian’s fear comes down to one thing: losing money.

And he’s not alone. I’ve seen the fear of a financial setback stop many traders.

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The challenge people like Ian face is sticking to a strategy. They simply can’t follow their trading plan — not due to a lack of discipline, but due to fear.

Research shows that fear can lead to poor decisions. And one of the worst things a trader can do is regularly break their trading rules. This is a sure-fire way to fail.

Now, I’m no mental health specialist. But I do know about fear when it comes to taking financial risk. This is something I’ve had to work on over the years — many traders do.

I describe myself as being mildly risk adverse. My lawyer laughs at this. He says it’s impossible for anyone who trades futures to be anything but an extreme risk taker.

But he’s wrong. Many of the best traders say managing risk is their biggest concern.

The truth is, you don’t need a high risk tolerance to trade. There are things you can do to override fear. This makes it possible to keep going when others stop.

My own fear is of a sudden, extreme loss. One so big that it takes me out of the game. I simply couldn’t trade if I let this fear take hold.

So what do I do?

Well first, I need to know my downside. I need to understand the worst that could happen. If I can accept this, then I won’t have a problem placing a trade.

You see, a big part of fear is worrying about the worst possible outcome.

But if you know the worst result isn’t that bad, then you remove the fear. It’s a bit like a child turning on their bedroom light — all the scary stuff goes away.

The second step is good position sizing. This can make all the difference.

Now, position sizing is a big topic. I can’t do it justice in a few lines. But let me say this. I never risk more than I care to lose. A loss will rarely cause me a second thought.

Think of it like this: Fear is a response to potential danger. The key is to reduce your risk to an acceptable level. This shuts off fear’s fuel supply — it can never get going.

I’ve had to face fear many times in my career. Chances are you have too.

I remember the fear of taking my first trade for the bank.

I remember the fear of starting a business from scratch.

I remember the fear of using my own capital to trade futures markets.

What if my best effort didn’t work out? The fear of failing was always present.

But here’s the thing. I can’t think of a time when facing my fears led to disaster. Sure, I wasn’t always successful. But I’ve never done something challenging and looked back with regret.

There’s no doubt in my mind — learning to manage fear has made me much better off today.

Until next week,

Jason McIntosh,

Editor, Quant Trader

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Jason McIntosh

Jason McIntosh

Jason McIntosh is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.

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