Why is it so important to be able to trade without fear?
The reason is that the emotion of fear clouds your judgement and makes it hard if not impossible to stick to your trading plan.
For example, the trader plans to enter a trade when it pulls back to a certain pre-defined level, he waits patiently for the pull-back and when price pulls back it does so with a large candle and high momentum. At that moment his fearful brain kicks in and starts rationalizing that this particular trade won’t work and it is best to wait until the next one. The entry is missed and price then either shoots off in the correct direction which leaves the trader kicking themselves for missing the entry or it would have been a loss which leaves the trader heaving a sigh of relief and cementing their fear in place by providing ‘proof’ that they were right not to take the trade.
The trader needs a way to think about trading that enables them to stick to their plan and when designing their plan I suggest they take into account the emotions that will come up at various points in the trading process and design their trading in a way that makes it easier.
In the previous example the trader would add a rule to their entry that when price pulls back to an entry level a strong support resistance zone needs to form on a lower time frame to provide a safe place to put the stop loss. Now the trader has taken their fear into account and has made it easier to enter the trade by providing confirmation that price is in the process of turning. Of course whatever rules are added to the system they need to make sense in terms of profitability.
When traders go through a string of losses that is the most testing time for a trader and can easily result in the trader missing trades or ‘system hopping’ as a way of relieving their emotional pain. At this point it can help if a trader knows the longest string of losses they are likely to expect and adds half again, for example if the back testing and past experience of the system shows a maximum losing streak of four trades and the trader is emotionally prepared for a losing streak of six trades then this can allow the trader to keep taking the trades and trade through the losing streak. This is why it is so vital for a trader to keep detailed records; they need to know the difference between a losing system that isn’t working and a winning system that is just going through an inevitable losing streak.
Another way to reduce fear of losses is to assign equal value to trades, for example let’s say a system has a winning percentage of 30% and a 1-5 ROI with a risk of 2% of the account using ten trades as a sample size, then each trade, winner or loser is assigned a value of 1.6 %.
If a trader knows that each of their trades is worth 1.6% whether winner or loser then they can have as a target to increase the average value of their trades to 2%. This way of looking at trades as data sets helps a trader to avoid seeing their losing and winning trades in a vacuum.
A further way to add value to trades is what I call ‘R’, that is whether the information from that trade has allowed a trader to improve their overall trading performance and by default their future winning percentage. If a trade allow a trader to improve performance then a trade has a value of 1.6R and a trade that doesn’t has a value of only 1.6. Trades that have an R value attached are more valuable winner or loser than trades that have no ‘R’ value because they determine whether a trader is able to increase their trade percentage over the long term.
This way of assigning value to trades enables a trader to see their trading with a sense of curiosity rather than fear; they can ask themselves if this next trade will add to the store of knowledge that will enable them to increase their future trade percentage, instead of “will this next trade be a winner or loser”?
There are many other ways to enable a trader to remove fear from the trading process; however these are practical methods that can be immediately implemented into a traders’ current trading process to help them make a paradigm shift, where they can see each trade as part of a larger whole which keeps losses in perspective and helps reduce fear.
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This article is based around the authors’ book which can be found on Amazon. ‘Overcome Your Fear in Trading’. Learn about the author’s free mindset webinar here.
