Fear is a driving emotion in most humankind, perhaps with the exception of some sociopaths. Feeling rather certain that most of my readers are not sociopaths let us proceed. Fear is caused by many things, some of them more recognizable as fear promoters. Generally when we talk about fear we relate to the scary things or situations that test our courage or in childhood language being a “fraidy cat”. But fear is much more sinister as it lurks beneath cloaked as something entirely different . It is not uncommon that anger is promoted by fear. A simple example would be the fear of someone having a low opinion of you thus you become angry with them. Hence fear is cloaked as anger, but at the root is that we value the opinion of others over that of our own and we fear they are correct so we become angry with them.
The same comparison can be made with trading as fear is at the root of many bad decisions. How about the fear of loss? Fear of lose is responsible for traders exiting too soon, though the reverse is also true since the fear of loss is also responsible for traders hanging on to a trade for it “to come back” and ultimately resulting in exactly what they feared.
Another fear cloaked as greed is the fear of not maximizing the gain. How many times have efforts to maximize the gains ended up being the exact opposite? I dare say it is more often than one would care to admit. Greed by definition is an extreme desire for something, often more than one’s proper share. Yet beneath the surface lies the fear of not making the most out of a trade. Because some say that is excessive then they describe it as greed.
A third, and certainly not a “sum of all fears” ( yes, I know it is a novel and movie title) is the fear of failure. When I speak of the fear of failure, I am not relating to the fear described above of losing money and staying in too long, but rather the fear of not being able to become a consummate trader. When one takes on a new task the objective is to succeed. It be foolish indeed to launch into a new career with no intention of succeeding. Why bother it that is the case? So, we must conclude that every trader has deep in his heart the desire to become successful as trader. In fact, it may be their desire to use trading as the sole source of the earned income. This fear not affects exits but entries as well. It is truly a major obstacle to overcome. The result if this fear varies from hesitancy of exits, exiting too quickly and even doubling down when their position goes negative. None of these circumstances are to be desired.
Admitting that I have but just scratched the surface of the many forms of fears that affect traders, the question remains what are we to do about it. It is very likely that a solution to any of the conditions of fear above will be a resolution to all of them. The are certain steps the must be taken to avoid fear. Since fear is an emotion and emotions vary from person to person those steps will not necessarily be the same for every person. But a general framework will give one a push in the right direction.
First and foremost you must start with a trade plan. Not something you have in the back of your mind, but a written trade plan with every step and situation clearly identified that someone else could read and understand. With this in hand much of what you fear will be alleviated by the solutions you have written down. If you cannot write your trade plan then do not attempt to trade. If you cannot write your trade rules, how can you hope to execute a proper trade entry and trade exit? Having a hard copy trade plan will boost your confidence, particularly if you have tested it and adjusted it to fit you personality and risk tolerance. I have often heard when I ask if someone has a trade plan, “Oh, yes of course” but when I ask for details there are so many ifs, ands and buts that no one could possibly follow it. We cannot possibly know what the market will do at any given time, however we should know how to respond to any market condition. By having that trade plan committed to writing you have address many of the aforementioned fears and given answers to overcoming them. Eliminating the enough goes a long way towards eliminating fear.
Writing a good trade plan often includes the use of a trading platform or trading methodology. One such methodology might be the TW Power Trader and the TW SRT which could form the foundation for both exits and entries. We will in another post write about putting together a trade plan. Also there will be following posts that address additional obstacles to good exits.