This is the single biggest problem you will face in the market, fear. Fear of what? Well obviously fear of losing money, and why not? Nobody likes to lose a trade right? The problem is that new traders dont realise that losing trades are part of the game, there is absolutely no way you can win every trade. They are taking the short term view, whereas professionals take the long term veiw, They work in a world of statistics and know that over a large sample of trades their edge will play itself out and will win more than it loses. They have a strategy that they know works, they are well aware that it may put in 10 losing trades in a row, but they have the confidence to apply it over and over as they know it works.
Fear is an emotional response to a perceived threat, its a survival mechanism that is built into everyone and has been since time began, animals have this also. Fear is probably the most powerful emotion that you will ever experience, especially fear of death, your body is designed to get you the hell out of situations that it perceives as dangerous or threatening. This basic survival instinct is great in nearly every situation apart from trading. Your feelings of fear when trading can range from mild discomfort to absolute terror! Your body is responding to, what it thinks is an outside threat, but is the market really threatening you? No its just producing data about price, its just doing its thing, you are the one that is perceiving the threat. Your body will produce adrenaline, this is to make your body more alert, its called the “flight or fight” response, ie. you either fight the threat or run away.
The problem is your body is only thinking about survival and its not interested in thinking logicaly about the situation. You are so pumped up that you cannot think properly, in an effort to help, your body has produced adrenaline, but this can also cause you to panic and make very basic errors. Take for example someone who is unlucky to stall their car on a level crossing and a train is approaching, this is a horrible situation but it demonstrates the point beautifully. So their on the level crossing and they have stalled, now if there was no train and they were not on a crossing they would just restart the car and drive off, but in this situation there is a massive adrenaline rush, they will panic and could easily fail to start the car. keys will end up on the floor or they will accelerate too fast and stall again. Lets hope the train stops on time. This happened to someone I know and they said they couldn’t move because they panicked and couldnt get the car moving, thankfully they lived to tell the tale.
This is very similar to what you will feel when things go wrong big time while you are trading, your body will have a fight or flight response to what it thinks as a threat, it is now difficult to view the situation in a logcal manner. You will make errors like exiting before you should or moving your stop away to try and avoid a loss. These are basic errors caused by basic human reactions.
Now going back to the poor guy and the train, thankfuly they lived, now how do you think they are going to feel the next time the come to a level crossing? yep! They will probably be very nervous about crossing, and this could be enough to make them make a stupid mistake again, perhaps they will acelerate to hard to try and cross quickly and run into the back of another car. This is unlikely in the real world, but you see the point Im trying to make, they are going to be scared of level crossing for a long long time. Eventualy their confidence can be restored but its unlikely they will ever cross the railway without thinking about what happened in the past. Thats just human nature and its not something you can really do anything about. The same is true for trading as I will show below.
So you’ve started trading for the first time and you have just won your first 5 trades in a row, congrats! You are in a complete carefree state of mind at this point, and what you don’t realise is that you currently are in the mindset of a professional trader, except for one thing, your not in the mental state to cope with a loss.
So here it comes its your 6th trade and your feeling confident, To hell you say, Im gona’ load this trade up n’ make some money!! s you put on x number of lots with no stoploss, click and your in. Your decision to enter may well be based on a semi decent strategy, hopefully you did some research before you started trading! so on it goes, 2min later your up 20pips then 30 then 50! Oh this is great! Then your back to 40 then 30 then 10, “shit!” why didnt I take the 50 pips, “shit shit shit!”. So its back at your entry, what do you do? ” mmm” (thinking). You leave it on, then your up 20 “I knew it!” you shout.
What you haven’t realised is a news item is about to hit the market and this is what happens. BANG! your back up to 30pips profit then 45 then 25, 10 , -5 , -28 , -50 , -100 then -160!!!! Remember all this has happened in a space of 5 minutes or so, your completely stunned by what has just happened. Your frozen unable to make decisions. Adrenaline is flowing through your body you, you panic, you fumble with the mouse! Eventually you cover at -185 pips at $10 a pip. 3/4 of your account is gone, you are in a state of complete shock!
This is a bad case scenario and thankfully mine was not as bad as this.
You now have the mind set of an frightened amateur, the care free state has gone, and my is it going to take some work to get it back! From now on your trading becomes a terrible night mare, you are taking small profits and big losses, so you tighten your stops (thank god you are least now using one) but they become so tight that you are getting stopped out alot before the trade has a chance to develop. Finally your account has gone, and you are completely drained!
You were just like the person who had a terrible experience on the level crossing, you panicked when things went wrong, you were unable to do the logical thing which was to get the hell out before it wiped out your account. It scared you, and left you in a state of fear everytime you took a trade, and it caused you to make silly mistakes, over and over, until you blewout your whole account.
At this point you will make one of two choices give up, or go looking for some holly grail indicator that doesn’t exist or some trading robot that is worse than you are. You are in the quest for knowledge, but your going after the wrong kind. Your only concerned with analysis of the market and not analysis of yourself. What you need is a trading plan to make these decisions for you and to get away from the market so that you avoid all this fear and panic.
Now I will leave that story for now, because there are other kinds of fear, the second is fear of being wrong. Its a simple fact that people dont like to be wrong, most people have a fairly big ego, and usually think they are better than other people. This is a big problem for the wanna be trader because the market doesn’t give a damn about your ego. If you are an acomplished person like a doctor or a lawer, you will be used to making decisions and having people do what you tell them. This will make no difference in the market, because you are a nothing compared to it.
So what happens when you get something wrong? Well you will probably feel embarrassed “how could I have been so stupid” you will ask. You will say “I’ve got to try harder not to get it wrong again” and the very act of trying will cause you to make more mistakes.
I will now show you an example of where you will not be botherd about getting something wrong. I’m going to toss a coin and ask you to choose heads or tails. Now are you going to be in the slightest bit concerned if you get it wrong? NO! Because you know that that it is impossible to accurately predict if it will be a heads or tails, And this is how a professional trader views the market, They know it is impossible to predict exactly what the market will do. This is so key to becoming successful that you really have got to come to terms with this. The truth is the market can do absolutely anything at anytime. So you have to stop beating yourself up when you are wrong in the market, because it is impossible to be right all the time. Its not about who is right and who is wrong, its about making good trades, and following a good pan and exercising good money management.
The third kind of fear is fear of missing out, this is almost as bad as the fear of a loss. Fear of missing out will cause you the enter trades that are of low quality because you are afraid that if you dont enter you will miss out on the chance to make money. Also fear of leaving money on the table, how many times have you taken a profit and the market roars on and you could have made you hundreds of extra pips? The amateur trader gets in a right tussel when they realise what money they could have made. But I can assure you that arseing about with your exits will cause you more frustration than its is worth. You need to start accepting the fact that there is no such thing as the perfect entry and exit. Remember you are working in real time and have no idea what is to come. If you can, walk away from the computer after you exit and dont sit there wondering what if’s all the time. Fear of missing out also foces you to trade when you shouldn’t, this is especially true for someone who sits there watching charts, you will start to become hypnotized by the movement and the market will draw you into a trade. Stay away as much as you can.