3 Ways to Cope with Trading Fear

01/20/2014 7:00 am EST


Gary Dayton

Founder, TradingPsychologyEdge.com

Being fearful in the face of uncertainty is natural, so while we can't eliminate fear from trading, noted psychology expert Dr. Gary Dayton of TradingPsychologyEdge.com, shares three steps for trading effectively through it.

Let's face it: Everyone sometimes becomes uncomfortable and even fearful when making a trade. This is a key topic in trading psychology. Even the very best traders are at times found to be apprehensive either when they're about to take a trade or while they are in one. Although this may seem counterintuitive because our culture and the media promote fearless trading, emotional control, nerves of steel, and other bunk, the truth is that being fearful in the face of uncertainty is our natural human response. We have survived as a species because we have been apprehensive and even fearful when confronting uncertainty. It's the "flight or fight" response that is hard-wired in our brains and nervous systems. 

When It Comes to Fear, Traders Do the Wrong Things
In a recent seminar, I asked traders how many experience some level of apprehension or fear when making a trade. I asked them to be truthful. Nearly everyone raised their hand. I then asked them if they fought the fear by trying to control or suppress their scary thoughts and emotions. Again, nearly everyone raised their hand. I then asked them to keep their hand up if this was effective. Everyone lowered their hands. I then asked them to raise their hands if they found themselves failing to pull the trigger or cutting a good trade short when fearful. All the hands went back up. 

The point is that just about everyone can become fearful in a trade. The common tactic of trying to control and suppress the fear, however, never works. And, because this coping strategy is flawed, we end up committing trading errors like cutting winners short and hesitating on a good trade set-up in order to escape the discomfort or the fear. It's a vicious cycle that traps traders.

The Right Things to Do

Here are three steps to take when dealing with fear:

  1. Acknowledge the fear. Remember, everyone has it and fighting it doesn't work.  Make room for your fear and accept it as a natural response to uncertainty.  Remind yourself that fear is temporary; it will pass. Your goal to become a successful and profitable trader is greater than your momentary emotional experience.
  2. Visualize your trading goals. All athletes set goals and use visualization as a way to see themselves reaching those goals. Traders can do this, too. Think about the goals you have for yourself as a trader. I don't mean money goals or statistical goals, but how you want to perform. For example, a trader cutting winning trades short might have a goal to hold trades longer and then visualizes him or herself doing exactly that: Taking trades and holding the trade until an exit signal is given.
  3. Focus on high-value actions you can take to reach your goals. Most traders are focusing on whether the trade is winning or losing. Focus instead on the actions you need to take to reach your goal. If it is holding onto a winning trade, your actions might be setting a protective stop, following price movement closely, bringing the stop to breakeven when appropriate, and telling yourself, "I am going to let this trade play out." As you may have experienced, worrying about whether a trade will win or lose diverts attention from the market. Your concentration is no longer on the trade, and this puts you at a distinct disadvantage. Like a golfer about to hit a crucial putt, if attention is on whether or not the putt will go in, it probably won't.

It's not easy to act constructively when the emotions are running high, but it's not impossible either. Visualization helps groove your behavior ahead of time, and this helps in the heat of the moment. Allowing emotions to occur without getting entangled in them helps you to stay focused on what's important. Instead of trying to control fear-which never works-traders should engage in high-value actions.  Concentrate on the actions that are relevant to your trading. Taking steps to manage your trade, for example, has high value to both the trade and for you as a trader. 

By Dr. Gary Dayton of TradingPsychologyEdge.com
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