Fear in trading and how to deal with it

We've all heard of the phrase, fight or flight because that is what humans are hardwired to do when facing fear.

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.

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