Trading Fears, We All Have Them.
It's How We Handle Them That Counts.
All market timers, traders and investors, in every kind
of market, feel fear at some level. Turn on the news one
day and hear that a steep unexpected sell-off is taking
place, and most of us will get a queasy feeling in our
But the key to successful "profitable" market timing,
in fact all trading, is in how we prepare ourselves to
handle trading fears. How we prepare to deal with the risks
inherent in trading.
Mark Douglas, an expert in trading psychology, says this
about trading fears in his book "Trading in the Zone."
"Most investors believe they know what is going to
happen next. This causes traders to put too much weight
on the outcome of the current trade, while not assessing
their performance as "a probability game" that they are
playing over time. This manifests itself in investors
getting in too high and too low and causing them to react
emotionally, with excessive fear or greed after a series
of losses or wins."
As the importance of an individual trade increases in
the trader's mind, the fear level tends to increase as
well. A trader becomes more hesitant and cautious, seeking
to avoid a mistake. The risk of choking under pressure
increases as the trader feels the pressure build.
have some fear, but winning market timers manage
their fear while losing timers (as well as many
traders) are controlled by it."
All traders have some fear, but winning market timers
manage their fear while losing timers (as well as many
traders) are controlled by it. When faced with a potentially
dangerous situation, the instinctive tendency is to revert
to the "fight or flight" response. We can either prepare
to do battle against the perceived threat, or we can flee
from this danger.
When an investor interprets a state of arousal negatively
as fear or stress, performance is likely to be impaired.
A trader will tend to "freeze."
There are four major trading fears. We will discuss them
here, as well as how to handle them.
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Fear Of Losing
The fear of losing when making a trade often has several
consequences. Fear of loss tends to make a timer hesitant
to execute his or her timing strategy. This can often
lead to an inability to pull the trigger on new entries
as well as on new exits.
As a market timer, you know that you need to be decisive
in taking action when your strategy dictates a new entry
or exit, so when fear of loss holds you back from taking
action, you also lose confidence in your ability to execute
your timing strategy. This causes a lack of trust in
the strategy or, more importantly, in your own ability
to execute future signals.
For example, if you doubt you will actually be able
to exit your position when your strategy tells you to
get the out, then as a self-preservation mechanism you
will also choose not to get into a new trade. Thus begins
analysis paralysis, where you are merely looking at new
trades but not getting the proper reinforcement to pull
the trigger. In fact, the reinforcement is negative and
actually pulls you away from making a move.
Looking deeper at why a timer cannot pull the trigger,
a lack of confidence causes the timer to believe that
by not trading, he is moving away from potential pain
as opposed to moving toward future gain.
No one likes losses, but the reality is that even the
best professionals will lose. The key is that they will
lose much less, which allows them to remain in the game
both financially and psychologically. The longer you
can remain in the trading game with a sound timing strategy,
the more likely you will start to experience a better
run of trades that will take you out of any temporary
When you're having trouble pulling the trigger, realize
that you are worrying too much about results and are
not focused on your execution process.
By following a strategy that unemotionally tells you
when to enter and exit the market, you can avoid the
pitfalls caused by fear.
This, of course, is what we do here at Fibtimer. We
learned long ago that unemotional (non-discretionary)
timing strategies save us during emotional times in the
market. We know the strategies work, so we put aside
our fears, and make the trades.
timing strategies are designed to guard against
And remember, you must be able to take a loss. Consider
them as part of trading. If you cannot, you will not
be around for the big gains because you will be on the
sidelines guarding your capital against that potential
Remember that good timing strategies are designed to guard against big losses.
Every trade you take has the potential to become a loss, so get used to this
reality and take every buy and sell signal. That way, when the next big trend
starts, you will be onboard and profit from it.
Fear Of Missing Out
Every trend always has its doubters. As the trend progresses,
skeptics will slowly become converts due to the fear
of missing out on profits or the pain of losses in betting
against that trend.
The fear of missing out can also be characterized as
greed of a sorts, for an investor is not acting based
on some desire to own the stock or mutual fund - other
than the fact that it is going up without him on board.
This fear is often fueled during runaway booms like
the technology and internet bubble of the late-1990s,
as investors heard their friends talking about newfound
riches. The fear of missing out came into play for those
who wanted to experience the same type of euphoria.
When you think about it, this is a very dangerous situation,
as at this stage investors tend essentially to say, "Get
me in at any price - I must participate in this hot trend!
Could we be in just such a situation now?
The effect of the fear of missing out is a blindness
to any potential downside risk, as it seems clear to
the investor that there can only be gains ahead from
such a "promising" and "obviously beneficial" trend.
But there's nothing obvious about it.
Remember the stories of the Internet and how it would
revolutionize the way business was done. While the Internet
has indeed had a significant impact on our lives, the
hype and frenzy for these stocks in the 90's ramped up
supply of every possible technology stock that could
be brought public and created a situation where the incredibly
high expectations could not possibly be met in reality.
It is expectation gaps like this that often create serious
risks for those who have piled into a trend late, well
after it has been widely broadcast in the media to all
Next week read part 2, the conclusion of this article
on "Trading Fears."
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.