Dealing with the ‘F’ word

Many traders suffer from the effects of fear whilst trading, and fear can manifest itself in several ways;

• Fear of losing money.
• Fear of losing a trade.
  
• Fear of giving back profits.
• Fear of leaving money on the table.

Fear induced trading can often lead to paralysing indecision and unforced errors that an otherwise rational trader would never make. Of course, the ability to act and trade in a rational manner is of paramount importance to those who desire consistently profitable results.

So how do we cut out the fear?

Many traders wrongly assume that the way to beat fear and irrational trading is to meditate one’s self into a zen-like state before switching on the charts and and taking hold of the mouse. Very often however, the real nub of the problem is typically much more basic. Usually, fearful trading is brought about by two things; A lack of confidence in one’s self and one’s edge.

Ask yourself now, honestly. Do you have an edge? Can you prove it?

• Have you back tested and forward tested this edge?
• Have you simulated this edge in live markets across varying market conditions?
• What is the size of your average winning trade compared to your average losing trade?
• How many of your trades are winners?
• What is your risk/reward ratio per trade?

All these questions are vitally important in the pursuit of rational, consistent trading. If you cannot answer them, or if the answers are not satisfactory, then you may wish to carefully reconsider whether you do indeed posess an edge in the markets or not.

Posessing a quantitatively verifiable edge is only one half of the equation. The other half is the issue of self confidence and your own ability to consistently execute your edge according to your own trading plan. It is surprising how many traders inexplicably deviate from their proven edge and trading plan through a lack of discipline, often the result of lack of proper training and preparation.

How do we instill self confidence in our trading?

The answer is deceptively simple. Practice, practice and more practice. Practice in a risk-free environemtn until executing that trading plan becomes an automatic and effortless expression of yourself, until you know exactly what to do and when to do it. This is the same principle as used by every elite performer who spends hours perfecting their techniques. The boxer trains in a gym, a chess champion spends hours in solitary practice, and the trader hones their skills on a simulator. This topic of simulation has been covered in more detail in my previous article.

Unfortunately, there is no shortcut for the discretionary trader. It takes a lot of effort and a lot of practice to develop enough confidence in yourself and your edge. Eventually though, if you persist with quantifying your edge and perfecting your ability to execute it consistently, you can and will reduce the effects that fear has on your trading. Well drilled soldiers perform best in the heat of battle. Now it is up to you to drill down and prepare yourself for the internal battle against fearful trading.

Until next time, good trading to you and I hope this article was helpful.

sam@efuturevision.com