Fear in trading and how to deal with it

However, humans no longer fear many of the issues they faced in years gone because they are no longer in our lives.

So, for those traders who experience fear, these feelings tend to come from our effort to survive. This may mean they struggle to navigate challenging market conditions, or when times are calm, they may not thrive.

We need to look at the four most common fears faced by traders. To do so, we will classify the fears they face to help understand and resolve them because these prevent us from performing well.

Taking wrong actions

Taking the wrong action is a basic fear most traders face in their analysis. This will manifest itself when the market starts to heat up, and the trader finds they lack confidence about taking action, leading to them making poor or hasty decisions.

This could see them exiting a trade prematurely.

This may be because they fear making a loss – it is this fear of being wrong that could have a massive effect on a trader’s decision-making ability.

It also means we may not be able to tell others, even family members, about losing.

This creates a stressful environment when we don’t face the consequences of trading losses because there’s a fear of being confronted by someone we love or respect, highlighting a failure so a trader may hesitate to execute a trade or even cut a trade short.

But these actions are based on emotions, and when trades don’t go their way, it could lead to them moving away from their trading plan, undertaking revenge trading or averaging down.

If this is the case, there could be a catastrophic outcome.

To overcome this, all traders will need to change their perception of making a forex loss and learn to accept it will happen.

Losing money when trading

There’s also a fear of losing money by an overexposed trader who suffers losses but can’t deal with those losses.

There’s a paradox when trading because the markets are about risking money to make money, but many traders do not have the maturity to cap or contain their losses in a way they can live with. This means they will need a tolerance for losing money and having the correct trading plan so they can overcome a fear of losing money when trading.

This fear could also see the trader not wanting to enter a market when the time is right because they doubt themselves and have developed a crippling habit. This could see a trader placing a low investment, so the profits are insignificant.

For those who experience this type of fear, the worry about losing money will be more significant than the satisfaction that comes with earning a profit.

Should you fear losing money, you could turn to a third-party solution such as taking a trading course, a better trading strategy or even a new mentor; everyone needs to appreciate that no trading system is 100% successful.

Consequently, a trader will need to work on their tolerance for losing money because it will happen. However, the trick is to learn how to respond to a losing streak and adjust your risk appetite to reduce losses. By doing so, you’ll find out if you are an overall winner or not.

©Gettyimages Witthaya Prasongsin

Fear of missing out

There’s also a fear of missing out on opportunities which creates another catalyst for making bad trading decisions. That’s because a trader might take a trade post-maturely.

This could occur when a trader sees a strong movement in the market and expects this would happen – and then they jump in, and despite fluctuations, they enjoy a successful trade.

There’s also the issue of entering the market prematurely and holding onto a trade before its price moves towards profit. Someone doing this in a live trade may suffer a significant drawdown.

However, if you are committed and honest to your trade confirmation, you won’t get all of the trades correct, but the ones you do will be accurate and rewarding, given you have a working risk management strategy in place.

Taking (too) small profits

The final fear we will discuss in this article is seeing a profitable trade retrace and open profits reduce.

This leads, in most cases, to traders getting nervous and “take what they have”, cutting their trade short and realising (too) small profits concerning their initially calculated risk/reward ratio.

On the other hand, there is also the issue of not taking profits when the time is right, believing profits will increase further. However, there’s always a chance that the price will work against them, so they take a loss or break even in a best-case scenario.

To deal with this fear of taking (too) small profits, a solid exit strategy is needed – and it must be strictly followed.

A trader should always backtest any strategy and risk management approach. This will highlight possible flaws and prevents the potential issue of taking (too) small profits in the future.

What could happen in an escalation between Russia and Ukraine on the global economy?

There’s no doubt that investors will be braced for torrid trading, particularly since the Russian President, Vladimir Putin, has been upping the ante in a growing crisis.

The situation wasn’t helped when Mr Putin recognised two breakaway regions in eastern Ukraine, Luhansk and Donetsk, as independent entities.

It’s these tensions that are rattling global markets and are wiping billions of dollars off the value of Ukrainian and Russian assets.

Moscow’s stocks plunged to their lowest level

But it’s not just the markets in the West that are worried; the rouble lost 3.3% while Moscow’s stocks plunged to their lowest level seen for more than a year after Mr Putin’s decision was announced.

Among those warning about stock-market turmoil are analysts at the Commonwealth Bank of Australia who say that Putin’s decision would exacerbate already high tensions.

They added: “Financial markets now wait for a response from the United States and Europe.”

That response will probably be in the shape of new, tough sanctions.

Analysts say that the measures could include banning US, UK and EU investment funds from holding Russian government bonds.

To put that into perspective, at the end of 2021, overseas investors held more than $43 billion of Russia’s rouble-denominated bonds, known as OFZs.

There are also fears that Russia’s banks may be cut from the SWIFT banking system.

MOEX in comparison to DOW JONES Index

Impact on global market confidence

Financial analysts are also warning that there could be an impact on global market confidence which is also struggling with inflation and fast-rising borrowing costs.

The futures markets are predicted to record falls but there will be a demand for traditional safe assets which has seen US Treasuries rally.

The UBS’ head of emerging markets strategy, Manik Narain, said: “This step (By Putin) increases uncertainty and creates further downside risk for global risk assets.”

His pessimism was shared by the managing partner at Florida’s Case Capital Advisers, Ken Polcari, who said: “We are going to see a negative reaction.”

He added that he was expecting the S&P 500’s ‘low point to be tested’.

Largest stockpiles of international FX reserves

It’s also worth appreciating that Russia holds one of the largest stockpiles of international FX reserves in the world at $630 billion.

However, the cost of insuring the country’s sovereign debt against default has also rocketed since 2016.

One of the issues is that Russia supplies 10% of the world’s gas and oil needs, and in Europe, that figure is 40%.

This has led to Brent Crude futures rising above $96 at one point, its highest price in nearly eight years.

The shares in travel firms have also been badly hit at the prospect of war in Ukraine, and even the shares of BP, despite the rise in oil prices, fell because it has a stake in the Russian energy giant, Rosneft.

WTI Crude Oil
WTI Crude Oil

‘Financial carnage’ will not last

However, not every analyst or commentator is believing the worst with the Spectators’ Matthew Lynn predicting that ‘financial carnage’ will not last should Russian tanks enter Ukraine.

He says that while this will be Europe’s most serious conflict since World War II, geopolitical events ‘rarely make a difference to the markets for more than a few days’.

He points to the Suez crisis, JFK’s assassination and 9-11 to make his point.

There is another issue, the FT’s Darren Dodd, warns and that’s the anxiety of current market conditions.

He says that in commodities, the tensions in Ukraine have worsened what has been a worrying inflationary ‘crunch’.

Part of the problem is that gas prices in Europe have been pushed up high because of storage and supply flow issues, and he warns that sanctions could have a severe effect on the price of materials.

Less than a week’s supply of copper stock

Of these raw material prices, Mr Dodd says that supplies are already badly depleted and that major exchanges have less than a week’s supply of copper stock.

The supply of aluminium is also low, and its price is at a 13-year high.

An analyst at Goldman Sachs warned: “This is an extreme inventory environment,” adding it is ‘unprecedented’.

The Wall Street Journal’s John Sindreu has written that the impact of war in Ukraine on investment portfolios will be hard to discern.

He adds that a conflict will certainly stoke rampant inflation.

Indeed, that’s the view of Simon MacAdam of Capital Economics 

He says that a Russian invasion, or a serious ratcheting up of sanctions, could see two percentage points being added to inflation figures in the West.

Investors are seeking out traditional safe havens

With jittery markets, investors are seeking out traditional safe havens, including the US dollar and gold – which has hit a 13-month high. 

Investors are also rushing back to bonds, even with the risk of increasing oil prices and inflation.

Reuters highlights that one indicator of geopolitical risk for the Eurozone is the exchange rate for the euro/Swiss franc.

It is normally seen as a safe haven by investors and the currency has been at its strongest since May 2015.

Grains and wheat futures

Sanctions would also affect grains and wheat futures with Russia ranking as the world’s top exporter of wheat, while Ukraine is the world’s third-largest exporter of corn, and the fourth for wheat.

Analysts are also predicting that natural gas exports to Western Europe from Russia will also be reduced significantly should sanctions be introduced.

This will, they predict, see gas prices returning to their previous highest levels.

Things also look bleak for currency traders and even without sanctions, the Russian and Ukrainian currencies have suffered.

The worst performing currency in emerging markets in the year to date is the Ukrainian hryvnia, while the rouble is the fifth-worst.

ING’s global head of markets, Chris Turner, said that the current potential conflict presents ‘substantial uncertainty’ for foreign currency markets.

Whether it is currency or commodity uncertainty, or jittery stock markets, investors and analysts alike will be watching carefully the news for reports of increasing tensions or Russian invasion.

Wall Street Ends 2021 With Existential Angst and Big Bonuses

While hosting retired partners at a dinner party in November, the Goldman Sachs Group Inc. Chief Executive Officer, David Solomon, proudly said his firm will feature among the most profitable large public companies this year. 

However, veteran banker Geoffrey T Boisi is surprised by how the excitement has taken a low-key. 

“I don’t know if malaise is the right word — it’s this uncomfortable feeling,” said Boisi 

Boisi left Goldman Sachs back in the 1990s to join JPMorgan Chase & Co as the vice-chairman. Later, he founded the Beacon group and Roundtable Investment Partners, where he is serving as the chairman and Chief Executive officer.  

In winding his remark, Boisi said, “People are more unsettled and ill at ease.”

The 74-year-old banker wasn’t simply alluding to the mood at the exquisite Manhattan’s Hudson Yards arts center that evening. 

Those who have enjoyed the past Wall Street booms agree that, in a sense, this one doesn’t evoke the best feelings. 

The wealth pumped in by deal makers and elite traders is possibly overtaken by the quick riches being flaunted by cryptocurrency enthusiasts, meme stocks, and fintech whizzes. 

There is also a sense of awareness that the financial sector is enjoying the benefits of the turmoil created by Covid -19 stimulus efforts and a bubble of market excitement that will fade away soon. 

J. Christopher Flowers, a prominent investor and former head of Goldman’s financial institution’s group, puts it this way.

Wall Street knows much of its windfall is coming from “speculative nonsense.” Take, for example, the glut of special purpose acquisition companies — or SPACs — making executives and some bankers rich as they rush to market. They have “a large element of baloney,” he said 

Banking’s Big Bonuses

During James Gorman’s five-year tenure at Morgan Stanley, the firm averaged close to US $3 billion of profit annually. But in this year’s first quarter alone, they made a whopping US $ 4 billion. 

JPMorgan, which hadn’t made US$25 billion before 2018, is expecting US $45 billion, while Goldman Sachs smashed its annual profit record around labor day.  

Several bankers, particularly those handling mergers and acquisitions, expect their bonuses to soar. 

Breaking Records

Clearly, Wall Street banks are breaking their 10-year-old revenue and profit records. However, in this race, you are not rated by what you have but by how much more you have than your competitors. 

During Wall Street’s pre-crisis boom, Facebook Inc. and Tesla Inc. were barely up and running, but right now, these companies’ founders alone are worth more than Citigroup Inc. 

Remember, this was once US’s most valuable bank. 

The packages that Goldman and JPMorgan gave their chief executives may pale compared to what Apollo Global Management Inc. and KKR & Co. will roll out for their bosses. 

Even Amateurs in meme stocks and crypto have shown off the Lamborghinis they have acquired from their new fortunes. 

Mark Gorton, chairman of high-frequency trading firm Tower Research Capital says there is always someone doing better than you and everyone measures their success against those people’s wealth.

Boeing – Expect a Pullback From Current Price Niveau

After failing at the resistance level of $230 the Boeing share price plummeted below $205, triggering further sell signals and ultimately found support at $185. Brave buyers saw their chance at these lows and pushed price back up over $210, where some profits were taken.

The current situation suggests that there is still potential to the upside, however buyers are probably waiting for lower prices.

We are expecting Boeing to retrace back into the support area at around $198, which offers a great entry level for technical traders. Should price break the support level it could trigger further sell signals – and ultimately lead to a re-test of recent lows.

Disclaimer

The above only reflects the opinion of the author and must not be understood as financial advise. This article shall only serve as a source of information.

Chart Analysis: Lufthansa Is Facing Resistance

Every trader knows that the higher the risk, the higher the potential gain – in case of Lufthansa it would have paid off if you would have taken the risk and scooped up some shares at the low beginning of December. Such risky investments are not for the fainthearted though and require a sophisticated approach to be successful.

If you have followed us for a while or even taken our trading courses you will know that we follow a very calculated approach when it comes to trading. We only engage if all items on our checklists are ticked – which keeps us out of trouble most times to be fair but also prevents potential (risky) gains as we have seen with Lufthansa.

That being said, the stock is still very interesting and not done just yet. We are approaching a technical level of resistance where buyers may lock in some profits and therefore stop the momentum we have built so far.

The screenshot above shows the two potential routes price may take in the next few days. From a technical analysis point of view we are facing resistance. That doesn’t mean that we won’t have the chance to break free and climb to new highs but the more likely scenario – looking at the current picture – is that price will retrace first before buyers may initiate another push to the upside.

The bottom line is we will probably see price ranging for a while before new impulses – whether it be up or down – are initiated

With our students and trading lounge members we will keep a very close eye on the price movements of the Lufthansa stock and take action accordingly.

5G interference worries Airbus and Boeing

The duo’s intervention adds pressure on US regulators in a protracted row pitting airlines and mobile phone companies over the roll-out of the fast yet controversial 5G mobile broadband technology in the United States of America.

They say that joint and concerted efforts are underway to evaluate and establish the extent to which 5G signals could tamper with the flight equipment.

In a co-signed letter to the US transport secretary, Pete Buttigieg, the Boeing chief executive, David Calhoun, and the Airbus Americas boss Jeff Knittel detailed the US aviation stakeholders’ mutual concern over implementing the 5G networks in the United States.

In a statement to the AFP news agency, an Airbus spokesperson said,

“Boeing and Airbus have been working closely with all the US aviation industry players to understand better how the 5G mobile broadband technology interferes with radio altimeters.”

In a separate statement, Boeing added that the aviation industry is keen on thoroughly assessing and resolving the potential 5G clash with radio altimeters.

“We are working together with aviation authorities, airlines, industry groups, and government leaders to ensure that aviation systems guarantee aircraft safety around the world” they said.

Giant telecom operators AT&T and Verizon were scheduled to launch their 3.7-3.8 GHz frequency bands on December 5th, 2021, after acquiring multi-billion dollar licenses in February.

However, the launch was postponed in November following intervention by the aviation industry’s regulator. The body expressed its concerns and fears over the 5G signal’s potential interference with the aeroplane’s altimeters.

On its part, the Federal Aviation Administration (The largest transportation agency of the US government) has asked for more information about aircraft gadgets that can leverage similar frequencies as 5G.

At the same time, the Federal Aviation Administration has developed directives that seek to limit the application of radio altimeters in specific situations. Apparently, this move has caused fears among airlines over the possible costs.

In November, AT&T and Verizon wrote to the Federal Communication Commission declaring their plans to roll out 5G networks in January 2022.

So far, the 5G network providers maintain that the upgrade is safe, and, airlines together with all other potential users, have nothing to fear or worry about.

However, they pledged to take additional cautionary measures, at least, until July 2022 as the Federal Aviation Administration completes its investigations.

In February 2021, the French authorities recommended switching off 5G mobiles phones on planes owing to the raging conflict between aircraft software and 5G networks.

The French civil aviation authority took action, saying that interference from a frequency signal to the altimeter (whether similar or stronger in power) would lead to fatal errors during landing.

Flight disruptions are looming even as airlines struggle back to their feet after the ravaging coronavirus pandemic that led to losses in billions of dollars last year.

Airline carriers are still contending with staff shortages and unruly passenger episodes meaning the industry is least prepared to shoulder the 5G clash, which might cost over 2.1 billion dollars in flight disruptions.

Accordingly, more aviation officials and airline executives are adding their voices to these concerns warning of massive flight delays in blizzards, poor visibility, cancellations, and diversions once the new 5G wireless service launches in January 2022.

Chart Analysis: Gold to Continue Recovery

A wise man once said “He who has the gold makes the rules”. With fundamentally uncertain factors such as the new Omicron variant and rising inflation rates, a surging Gold price should be anticipated, with investors looking to hedge their portfolios against a potentially nervous market.

Our Trading Idea in The Short-Term

As active traders we are seeking to take advantage of the situation.

Looking at the chart above, it is quickly determined that price seems to have found a bottom (blue box). From here we can look for potential setups to place our trade.

The favourable scenario would be for the price to break above the most recent intermediate highs (dashed line) and continue to our minimum target of $1845.61.

The alternative scenario sees the price to stall at $1813.69, once again – if so we would have to re-asses and determine whether we are dealing with a well respected resistance front or a potential fake move, which would see price initially bounce off the resistance level but then eventually break above the highs and continue to our target.

With all that in mind we will wait for a setup to develop according to our strategies and take action accordingly.

Disclaimer

The above only reflects the opinion of the author and must not be understood as financial advise. This article shall only serve as a source of information.

The biggest risks Bitcoin is facing in the months ahead

Regulatory Impacts

Bitcoin and cryptocurrencies in general have been in the news in recent weeks due to the clamp down China is having on the industry. China has been aiming to shut down the energy-intensive crypto mining operations and ordering businesses not to work with cryptocurrencies.

Further to this, the UK regulators banned Binance, one of the leading exchanges for digital currencies. It should be noted though, that this merely bans Binance from starting regulated activities within the UK. It does not stop UK residents from using Binance.

Last year, Donald Trump’s administration put forward an anti-money laundering rule which meant anyone making transactions of $3,000 or more in a private digital wallet would have to undergo identity checks.

All of these pressures on the regulation of Bitcoin and other cryptocurrencies have led UBS to state that they’ve long been warning that regulatory crackdowns could lead to a bubble pop in the crypto markets.

Environmental Concerns

Elon Musk brought the identification of concerns of Bitcoin’s environmental impact to the forefront. Bitcoin’s critics have long spoken about the negative carbon footprint which vast Bitcoin mining can cause. This has just been emphasised by the fact that Musk’s company, Tesla, backtracked on their $1.5billion investment in utilising Bitcoin as a core payment method, to completely taking it out as an option.

The environmental impact of Bitcoin has certainly been called into question by some asset managers, with a growth in ESG policies in the finance world, many investors are seeking to avoid investments which negatively impact the environment. If this problem isn’t solved for Bitcoin, it could lead to many investors ultimately avoiding it and seeking alternative cryptocurrencies.

Volatility

Bitcoin has seen significant swings in its price, alongside most other coins. Bitcoin saw an all time high this year of $64,829. However, it has been tumbling down since then, and even slid below $30,000.

Looking simply at the gains Bitcoin has made, it is still up more than the S&P 500 year-to-date. However, the significant swings and ability to suddenly drop in a relatively short space of time could lead to some larger investors avoiding it as a significant risk, certainly for those looking for more short term investments.

UBS stated that there is limited real world use, and due to the volatility of the price, it is primarily used by individuals to make speculative gains.

Scams and ‘Meme coins’

Huge levels of speculation in the crypto markets have been seen this year, seemingly with a new coin promising 1,000%+ returns popping up each and every week.

‘Dogecoin’ which started off as a joke surged wildly this year to record highs, even being promoted and pushed by Elon Musk. The level at which these ‘memecoins’ can be manipulated by simple social media posts has led to many staying far away from them, and the negative association of this manipulation has the potential to also spread to Bitcoin.

There was a point this year where Dogecoin was worth more than Ford, amongst other US companies. However, since the price was pumped up by tweets from Musk, it has since depreciated significantly.

The Power of the Modern Retail Investor

Due to the pandemic leaving individuals alone at home, and bored, many amateur investors have ended up seeking excitement in the form of joining retail investment platforms, such as Robinhood. In addition to the hunt for excitement during lockdowns, many could not ignore the onslaught of positive news coming from Sub-Reddits such as Wall Street Bets, where stories could be heard of individuals making hundreds of thousands of dollars in mere days.

Robinhood was set up in 2013 as a mobile trading app, and was recently valued at around $21 billion. The premise is that they provide easy access to trading for retail investors, with zero commissions.

John Marshall, the head of derivatives research at Goldman Sachs commented that “For the largest online brokers, the number of daily trades has tripled since 2019, But this has mainly been driven by a small portion of their customer base. These day traders are less than 10% of their customers, but they represent more than half of their trades.”.

The Growth of ‘Meme Stocks’

The core events which were notable in the news involved stocks such as GameStop and AMC Entertainment, and they are considered as one of the first large scale social media driven buying regimes by retail investors. It led to significant fluctuations of the share prices, and it has been likened to the dotcom bubble around the turn of the century, where prices were just yo-yoing erratically.

The sheer level of volume being traded in January 2021 due to the rise in retail investing popularity was huge. To put perspective on this, on the 27th of January at the height of the GameStop storyline, 24 billion shares were traded on US Exchanges. This surpasses the last record set in 2008 during the financial crisis of 4 billion.

Steal from the Rich to give to the Poor

The story of GameStop essentially arose due to it being heavily shorted by Hedge Funds. During the pandemic, the company as a brick and mortar only store was expected to perform badly. However, retail investors on Reddit realised they could weaponise their involvement on GameStop.

“A co-ordinated and well-informed market manipulation used retail platforms like Robinhood to squeeze shorts on the likes of GameStop and AMC,” says Steve Keslo, head of markets at ITI Capital.

The short squeeze which ensued drove the price higher and higher, which led to Hedge Funds being forced to buy back shares to minimise their losses. This further led to price increases. Overall, it is estimated that there were almost $5 billion worth of losses to Hedge Funds surrounding the GameStop fiasco.

In society, the financial markets, and rather the individuals which historically have worked in the financial markets do not have the best reputation from an outsider’s perspective. This was the driving force for a lot of the GameStop buying. It was a feeling of comradery to steal from the rich (who had been perceived to manipulate it themselves for their own gain), and return the wealth to the normal man. The Reddit Retail Investor.

What is your risk/return profile when trading or investing?

Maybe you have a low-risk approach towards your long-term pension planning, especially if you’re close to retirement. But with a separate pot of money, perhaps you have a higher risk/reward attitude for buying that boat or Lamborghini in the shorter-term.

Of course, doing almost anything in life has a risk / reward ratio. Indeed, not doing anything also has a trade-off. There are many days I have this debate before getting out of bed, for example.

Generally speaking, low risk means you should expect a low return and vice-versa. In investment terms, taking a low-risk approach could mean expecting a small and sometimes even slightly negative return (e.g leaving your money in a savings account vs the current rate of inflation). It does mean you heavily reduce your chances of large losses – But also of large gains.

Allowing inflation to erode the real value of your money (ie Inflation Risk) is a big risk of doing nothing with your money. And with western governments arguably being forced to embrace aspects of *MMT, many commentators are concerned that the risks of inflation could be high in the not-too-distant future.

Any investment advisor worth their salt can help you assess your risk tolerance and discuss what return you should expect (over the long term) from the market and an appropriately diversified portfolio.

In effect, they are helping you measure how much volatility you can emotionally take before you decide to sell, at the worst possible time – and invariably at a loss. However, the other side of that coin is what return you need, or indeed ‘want’, from your money. If these two sides of the risk/reward ratio don’t agree, there needs to be some compromise.

Finally on the point of Risk – Most pilots are human, therefore you suffer from many cognitive biases. One bias particularly attached to investing is ‘Risk Aversion’. In short, it is an irrationality found in humans when it comes to calculating risk.

Another bias relevant to trading is the bandwagon or ‘herd mentality’ effect (have you seen the price of Dogecoin lately?). This is why many inexperienced Retail (ie non-professional) traders / investors lose money in financial markets. They see the price of an asset going up (they might have even heard about it from the Airport shoeshine boy) and they buy in the hope of catching a price increase. However, in many cases the market is over-extended by that point and falls back after the late comers to the party have arrived. The price continues to decline before the inexperienced Retail Trader cuts their losses and sells – And guess who they’re selling to?

At Line Trading Pilots we aim to educate you on both long-term investing for capital growth and short-term trading for income generation. Even though both practices may have similarities, for the Retail Trader / Investor they are poles apart. Yes both involve trading securities, but the big differences lie in the area of risk/reward ratios and time horizons.

If you wish to make money from active trading, it takes many hours of studying, practice, mentorship and on-going work. But the rewards are there if you’re prepared to put the work in.

And that’s where we come in. We will help you analyse the risk/reward ratio of actively trading Forex (or other large volume securities), whilst balancing that out with your long term plan.

*We will cover MMT along with other economic theories in a separate blog

Homework
What asset is generally considered the risk-free return? Would that be ‘risk free’ for you?
Do you know what the low, medium and high-risk asset classes are?
What assets are considered traditional hedges against inflation? Is that changing?

For all the answers and more, register your interest at Line Trading Pilots.com