A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Fear: The Enemy of Trading Success
07/29/2015 6:00 am EST
All traders feel fear at times, at some level or another. However, for Frank Kollar, of Fibtimer.com,what is important is how fear is dealt with when it rears its ugly head. According to Frank, for fear to be conquered, it all comes down to having a plan and sticking to it no matter what.
Fear is defined in the dictionary as:
"...an unpleasant, often strong emotion caused by anticipation or awareness of danger...implies anxiety and usually the loss of courage."
The fact is, all traders, investors, and yes market timers, feel fear at times, at some level. What is important is how we address it. Knowing the definition, and reasons for fear, can actually help market timers to overcome it.
In the book Trading in the Zone by Mark Douglas, he describes how most traders (market timers) "...believe that they know what is going to happen next."
This can cause market timers to put too much importance on the current trade and to lose focus on their performance over time. Market timing is based on probabilities that make us successful over time. But too much focus on a single trade causes the fear levels to rise. As this occurs, market timers become hesitant and cautious, trying to avoid mistakes. The risks of choking under pressure (not making a trade) build.
All market timers, at times, feel fear. But successful market timers manage their fear, while losing market timers are controlled by it.
When faced with a particularly stressful decision, it is a perfectly normal human response to revert to the fight or flight response. Either we do battle or flee. When a market timer feels such an emotional response, his or her decisions are very likely to be adversely affected.
Fear of Loss
The fear of loss can keep a market timer from executing a trade. Or it can keep him from exiting a trade when the trading plan calls for it. Either can be costly. No one likes to have losses, but even the very best timers do. The key is to realize that you are worrying about the results of that trade and not concentrating on executing the plan, which over time will make you successful.
Trading plans take time. No single trade makes or breaks the plan. Once you understand and accept that, it is much easier to make the trades without the fight or flight response hampering your ability to act.
NEXT PAGE: Three More Fears Traders Need to Learn to Control|pagebreak|
Fear of Missing Out on Profits
This fear is usually felt during runaway rallies. All your friends are talking about the incredible profits they are making every day. If you really look at this in the right perspective, it is a very dangerous kind of fear. It eventually causes you to buy in, and of course, when you and thousands of others who feel the same way react at the same time, the market is finally at its top.
Having a trading plan, and sticking to the trading plan, eliminates this fear. You know your plan works, so you are not susceptible to the greed factor that comes so easily in market rallies.
Fear of Losing Profits
This fear arises when you have a profit and start worrying about losing it. If you take your profits, you will feel like a winner. But you know this story...the market will likely continue in the same direction, leaving you with an entirely new set of fears.
Fears cloud decisions. And decisions clouded by fear, that feel right at the time they are made, are more often than not...wrong.
Again, back to the trading plan. You know what to expect, because you have a plan that will succeed over time. It will bring in those profits. So a commitment to the plan relieves you of the fears of missing out on that quick profit and the decision that invariably turns bad.
Fear of Being Wrong
The desire to be right is in direct opposition to the ability to be successful.
The desire to be right is in direct opposition to the ability to make money.
A market timer's desire to be right, to be able to tell his friends how successful he or she is, can become so powerful, that a he or she winds up second guessing, the plan by taking winners too quickly or holding onto losers in the hopes that they will come back, or at least break even.
To sum it all up, successful market timers actually make their profits off the fears of the majority of investors, traders, and even other market timers.
They do this by sticking to a plan and not allowing emotions (fears) to rule their decision making ability.
Fear can be conquered when you have a plan. As time passes, confidence builds, and the plan will become easier and easier to follow. Stick with the plan.
By Frank Kollar, Editor, Fibtimer.com
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