Trading the Markets: Fear
Success in trading and investing both is a function of conquering the technicals and your own psychology. If you are only good at technicals, you would make money in some trades but lose more money than you earned in other trades. If you don’t become a good analyst of technicals, you won’t be able to find worthwhile trades.
Start reading about technicals here. In this article, I’ll talk about one emotion that everybody feels when they have to deal with the inflow and outflow of money directly: FEAR.
From what I’ve experienced, there are 3 major types of fear associated with financial markets in the minds of most people:
Fear of Missing Out (FOMO): We feel FOMO when we see other people making money from the markets, and we are not doing the same. This problem has been magnified by the circulation of ads and fake screenshots on social media. These people’s goal is to make you believe you can make money by copying them and juice us out of money in the process, with us ending up none the wiser.
Fear of Being Wrong: As a part of growing up, most of us, maybe even all of us, are told that being wrong is not to be desired. When we make mistakes in school, we lose marks, which makes us fall behind our friends and us being resentful. When we make mistakes at home, we may be scolded. So as a habit we don’t like making mistakes, or more to the point, being wrong about a trade we took.
Fear of Losing: Nobody likes losing money. So we naturally try to avoid losses as much as possible. When you engage with the markets, this type of fear comes in the form of us not being able to cut losses because until we book a loss, it is a paper loss and not real. We think and hope that maybe the trade will come back and give us a profit, or at least take us out at breakeven - thereby not making us lose money.
Each of these can hamper your results when trading or investing. So how do you conquer these fears?
I feel the solution to all these fears is to have a profitable trading plan. A plan where you have set criteria for when to enter and when to exit a market. And this plan should be backtested with data, that is, you should have proof for yourself that the plan works in whatever asset you are working with. For example, you could have a plan where you buy stock of Company A when they give good results in a quarter and hold until there is a bad quarter. I’ll talk about the components of a trading plan in a later article.
When you have a plan for yourself, which is profitable on its own, you won’t feel the need to copy others. Plus, since you know it is profitable, you are free from the fear of losing money, obviously for whatever time frame your plan works.
Another thing you can do to get over the fear of losses, is to trade with a small amount of money until you’re sure you’ll be able to cut losses and book profits when required.
Lastly, to overcome the fear of being wrong we all have ingrained in us, what we can do is hammer in our mind that the game of the markets is one of probability. You win some, you lose some, as simple as that. You will for sure lose some trades, no getting around it. So there is no need to feel fear over something that is part of your planning. And since your plan is profitable, you can be sure that over 10 trades or 100 trades, you will make money.
Tell me if you feel any other kind of fear when buying or selling assets. Also, subscribe for free to receive new posts and support my work. And do let me know if you want a specific topic covered!
P.S. You can read all my articles here.