Trading Fear: 7 Deadly Trading Sins Day 6

Scared money does not make money in the stock market. Traders who trade with fear will never be able to consistently extract income from the markets. Fear manifests itself in many different forms in trading. We discussed one of the forms yesterday in our article about FOMO. Today we will talk about the other ways fear will appear in your trading, and what you can do to overcome them:

Fear of Losing Money

You cannot make money from trading without risking money. A common reason why traders bring fear into their trading is by risking too much money. They are risking a large enough proportion of their capital that they are emotionally attached to it. Traders also get afraid of losing money because they are attached to their money.

They don’t understand that trading is a game where you have to risk money to make money. What you risk per trade is the price you have to be willing to pay in order to see if you are correct on your trade thesis.   

You cannot let the fear of losing money deter you from making a trade. In order to eliminate this fear, risk proportionately to your account size, and really accept the money you are risking. Accept that losing money is inevitable in trading.

It is like when you play Texas Hold’em: You cannot win the pot at the end without putting your chips in and riding out the round. You will not win all the rounds, but if you’re skilled you know you will make money by the end of the night.

Fear of Winners Turning to Losers

One of the biggest misnomers in trading is the saying “you cannot go broke taking profits.” You actually can. Not letting your winners run has disastrous consequences in the long run for your trading results. Traders who are on a cold streak will often make this mistake. They have had a lot of losers lately, and they want to take profits as soon as they have them.

You cannot let the fear of a winner turning into a loser cause you to take profits too soon. A huge component of a successful trading system is your risk vs reward ratio. To have a good risk vs reward ratio, you need to have big winners and small losers.

If you are taking profits too soon, you will never be able to have big enough winners to cancel out your losing trades. Focus on the market trend, not your PNL when you’re in a trade.

Fear of the Unknown

There is a lot of uncertainty in trading. Before going into a trade, you have no idea if it will be a winner or loser. Winning traders know what SHOULD happen, but even they have to deal with the same uncertainty as everyone else. If you cannot handle uncertainty, trading is not the right profession for you.

In order to accept the unknown, you need to accept all of the possible outcomes once you enter a trade. There really is only three scenarios you have to prepare for:

1. What you do if you’re wrong, aka where do you put your stop. 2. Where is your 1st profit target, and how much will you sell. 3. How will you trial after taking profits: Will you move your stop to breakeven? Where will you sell the rest of your shares?

Everything else that goes on is just noise. Focus on what you can control in a trade, and accept that there many things that go in the markets that are out of your control.

Once you map out these scenarios, you don’t need to do anything else once you’re in the trade besides let it play out. This will prevent you from getting fearful when you’re in a trade, and allow you to let your trade to play out without micromanaging.

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