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
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.
|"All traders 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
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 trading slumps.
When you're having trouble pulling the trigger, realize that you are
worrying too much about results and are not focused on your execution
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.
|"...good timing strategies
are designed to guard against big losses"
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 loss.
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
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!
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 investors.
Next week read part 2, the conclusion of this article on "Trading
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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.