Home Advanced Psychology and trading Different Types of Fear in Trading

Different Types of Fear in Trading

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What is fear?

According to Dictionary definition, fear is a “distressing emotion aroused by impending danger, evil, pain etc.  or the condition of being afraid.” Here, what you need to look at is whether the threat is real or imagined. In trading, the threat is just imagined. This fear prompts us to make unfruitful decisions.

There are mainly four different types of fear we face in trading. It is sure that you would have encountered it at one or the other point while trading. But to grow as a trader, you need to realise those fears and embrace them. It is fear that will take you forward. So let us see one by one what those fears are:

Fear of being unknown

Most of the times you trade without knowing how much money you might lose in the trade. This is called gambling. There are a lot of unknown factors in the market. You are exposed to these factors when the price goes against you, leaving you paralysed and helpless.

The only thing left for you to do is pray and hope for the price to come back. This is the fear of being unknown. This is due to the lack of proper trading education. It is mostly the new traders who encounter this type of fear because they are most attracted to trading. New traders are not aware of what goes behind the scene and reality.

The best way to overcome fear of being unknown is by understanding what trading is all about. You can do this by reading good trading books and taking various courses in trading.

Fear of being wrong

Humans are taught from their education system always to be right. We all just don’t like o be wrong and will try our best to defend ourselves. Similarly, in trading, a trader wants to win all the time and tries to trade without placing a stop loss. You can see below what can happen to you.

We have something to learn from the above chart. You can be right 70% of the time and yet cannot be profitable. This happens because your losses are much higher than your profits. For example, you make $10 on every winning trade and on losing you lose $30. Even after winning 7 out of 10 times, your net position is -$20.

On the contrary, if you are right, just 30% of the time, you will still make money. But here your wins are much higher than your loses. For example, you make $30 on a winning trade and lose $1 on a losing trade.  Assuming you win just 3 out of 10 times, your net position is +$20. Remember, there exists no correlation between your winning percentage and your profitability.

Fear of missing out (FOMO)

Before talking in the language of trading, let us take a real-life example. Imagine you wanted to buy a phone from the longest time. And one day there comes out a sale for a limited time. It is a guarantee that you will rush to buy that phone without thinking twice. Here there is nothing to lose other than the money needed to buy the shoes.

Why did you buy it in such a hurry? You had the fear that you would miss it; hence, you didn’t want to let go of the opportunity.

When you have similar feelings in trading, things can get ugly. Let’s say you wanted to go long in a pair whose support was holding from the last few weeks. Due to some reason you missed the trade and price has rallied without you.

So that you don’t miss the trade, you went long at the current market price (CMP) without even looking at its position. It is usually that place where the market turns. You can see from the below chart, what happens next.

If the trade does not match your trading setup, simply let it go. There is no point in chasing the market. You should never break your trading rules. These only cause regret. Keep in mind that some market situations will be suitable for you and others will not.

Fear of loss

Psychologists Amos Tversky and Daniel Kahneman say that losses are twice as powerful as gains. This means that humans fear loss and do whatever it takes to avoid losses. When they try to do that in trading, they make decisions that are not right. As a result of this, it leads to the following actions.

Unable to cut loss-When loss is unacceptable to you, you are hesitant to take any action. This only makes you hold the trade for long. Ultimately results in blowing up your account.

Failure to execute trade-When the fear of loss exceeds more than usual. You are scared to pull the trigger when the time is right. The fear at the back of your head freezes your mind, and you are not in a position to take even the right action. Due to this, you miss the profitable trades. Fear of loss has another consequence, and that is fear of giving back profits.

Handling fear in trading

Here are few methods suggested and should be used by all aspiring traders. They not only help in overcoming fear but also how to handle it.

  1. Always trade with the money that you can afford to lose. You should not use the money that is used in fulfilling daily needs.
  2. Keep a conservative attitude towards the market. Only risk 1% of your account on each trade. As even if you lose five times in a row, it will not affect you mentally.
  3. Never forget that trading is a game of probabilities. There is nothing certain about the market.
  4. Place limit orders and stop-loss orders before entering a trade.
  5. Stick to your trading plan and do not violate it at any cost.

If you follow all the steps mentioned above, then you can surely eliminate fear in trading.

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