Fear is the most common cause of trading failure. It is natural to have an emotional attachment to money, and normal to fear losing it. But in trading, being fearful causes poor decision making and to make decisions that will lose us money. Fear will manifest itself in 4 ways in your trading:
- Fear of losing money
- Fear of being wrong
- Fear of missing out
- Fear of a winner turning into a loser
We talked in an article a couple of weeks back how these 4 things are the primary causes of all trading mistakes. Today we are going to talk about how you can overcome these fears and eliminate them from your trading. Here are 3 tips to overcome all of these types of fears:
A big cause of your fear when you trade is uncertainty. Uncertainty is unavoidable in trading, but it can be minimized by planning each trade THOROUGHLY before you enter. Before every trade you take, you should know the following:
- Why you are taking the trade (setup/pattern)
- Price you will enter at
- Your profit target (s)
- Your stop loss
- Entry strategy (Scale in, or full size right away)
- Exit strategy (Scale-out or sell everything at once)
- How much money you will risk
- How many shares you will buy or short
When you know all of the answers to these questions going into a trade, you know what you should be doing in any given market scenario. This will take a lot of the thinking and anxiety out of a trade once you enter. Everything is already planned out, and you are just executing once you enter the stock. The trade either works, or it doesn’t. Simplicity eliminates fear in trading.
Oversizing is one of the main causes of your fear of losing money and poor trading decisions in general. When you are oversized, you are trading money that you are emotionally attached to. And this attachment will cause you to panic sell when the stock makes a small move against your position, sell too early, and fail to stop out of your positions when you are supposed to.
Successful trading is the result of being able to look at markets objectively. Trading smaller will help eliminate your fear in your trading because you are not trading money you are emotionally attached too. You want to be trading large enough size that makes the time you put into the trade worthwhile, but small enough that you don’t feel emotional if it is lost.
3.Tracking Your Trade Metrics
A big issue many losing traders have is that they are not tracking their metrics. They are often trading a setup that someone else executes profitably, but they have no idea if it works for them also. There are thousands of proven strategies out there, but you don’t know if you can execute it profitably until you take trades and track them.
Here is an example of a setup I use that doesn’t work for everyone: One of my go-to-setups that accounts for the majority of my yearly PNL are earnings breakdowns. I have a 70% win rate on this setup and know with certainty that if I take this setup 10 times I will make money. This strategy works well for me, but I know a ton of traders who cannot execute this strategy profitably.
If you are not trading a proven strategy you know with statistical certainty will make you money in the long run, you will always have fear in your trading. You don’t know for certain a strategy or setup will work for you until you track it, and you make money after 30 times (or more) you take the setup. Learn more about how to track your trades correctly in this article here.
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