Fear, defined as an unpleasant emotion caused by the threat of danger, pain or harm. In theory it would be nice to eliminate fear, not just in forex trading, but in anything we do. For example, leaving our existing job to apply for another!
Buying a new house and taking on more debt! Standing up in front of thousands of people and giving presentations, I’ve done that last one and God it’s scary.
However, fear shouldn’t be eliminated, it’s a good thing that you are scared, it makes you evaluate decisions. Fear makes you think before you leap. Fear also defines that you have some respect for what you are about to do.
This article is going to explain the most common fears in trading and how to overcome them.
All 3 of these approaches are very good when it comes to forex trading. Fear in forex trading helps you to evaluate whether you are doing the right thing. It helps you manage your risk. However, there is healthy fear as described above, and there is unhealthy fear, and that can be extremely destructive. Let me give you an example of both types of fear.
The Different Types of Fear in Forex Trading
You are about to put on a trade, you’re not sure whether it’s the right thing to do so you are fearful of losing. Because of that fear you manage your risk and perhaps use a stoploss and risk just 0.5% of your account size.
That is healthy fear, you’ve acknowledged there is a risk and you are going to manage that risk accordingly.
Unhealthy fear might be where you have had several losing trades in a row and you fear that you are going to blow up your account. So, you take unhealthy trades to try and make back recent losses. Perhaps risking more than you should or not even using stop losses.
This is unhealthy fear, you have changed your mentality from using fear to make sensible decisions to giving in to fear which is driving silly decisions.
You can never really get rid of fear in trading and nor should you want to. You can however overcome your fears in trading by focusing fear in the right direction. The risk of losing money will inevitably always bring fear, and that’s why when starting as a trader, you should always look to trade money you can afford to lose.
Never think of trading as a way out of a financial hole, that’s when you start emotionally trading, and that really is a road to ruin. If you trade emotionally you make emotional decisions, and trading is not about emotions, it’s about logical sound decision-making.
Bill Lipschutz, a very successful forex trader once said, “If a trader is motivated by the money, then it is the wrong reason. A truly successful trader has got to be involved and into the trading, the money is the side issue… The principal motivation is not the trappings of success.
It’s usually the by-product – simply stated ‘the game’s the thing’.”
What he is saying is that you need to forget about the money element of trading, the money is simply the facilitator for you playing the game. I guess you could liken it a bit like poker where you must buy a seat.
However, if you get things right and do your proper due diligence then you can make a lot of money. You shouldn’t enter this game with the intention of making lots of money.
Let’s take a quick look at some of the most common issues relating to fear and forex trading and how you might consider overcoming them:
Fears in Trading and How to Overcome Them
Ever sat looking at your charts arguing with yourself as to whether you should take a trade or not? I have personally been there, where you have so much information on your charts you can’t see the wood for the trees or good ideas from bad ideas.
I look at some people’s charts with lines, indicators, patterns, advisors and arrows and wonder how the heck they can make any decision. Forex trading doesn’t need to be complicated, in fact most of the pros keep it very simple.
You don’t need huge amounts of indicators, they simply tell you what has happened to price and not what will happen.
If you have too many of these you get something called analysis paralysis, which means that you have so much analysis on your charts you can’t work out what is right and wrong. Therefore, my 1st tip for overcoming fear is to try and keep things as simple as possible.
Don’t clutter your charts with indicators, remember all indicators do is tell you what has happened with price in an attempt to predict what will happen, and invariably they don’t work.
Fear of loss
This is probably the most common when it comes to trading fears. The 1st thing to remember is that no matter how good you are at trading, you will have losses. Even the biggest hedge funds have losses occasionally.
As humans we don’t like to lose, it leaves us feeling like failures, but when it comes to trading you need to not think of losses as losses. Sound strange? You have to consider your losses as a cost of doing business. If you owned a shop you would have to pay electricity, rent, staff, losses are essentially the equivalent in trading.
In fact, compared to owning a shop trading is very cheap.
I’ve said this before, the other way to avoid this fear of loss is to not trade with money you can’t afford to lose, this is a critical part of being successful. Use a demo account while you are learning, start with a very small account and trade micro lots until you are confident.
Once you take away the fear that you are going to lose money that you need to pay bills or feed the family things become much easier.
Finally, proper risk management. I will do an article on risk management in more detail later, but by having a proper risk management process it reduces the huge amount of pressure. When I talk about risk management I’m talking things like what the maximum amount of risk you are going to accept on any one trade, for example, 1%.
What is the maximum number of trades you will have open and the maximum amount of risk across those trades. Again, for example, you may say you want a maximum of 5 trades at any one time risking 5% of your account. It also really important to manage your trade size, you can have bigger stop losses but you should lower the trade lot size to account for it so you continue to only risk your maximum.
Fear of missing out
This is another very common trading fear, and in some cases, can be worse than feeling loss. It is very easy as a trader to want to take as many trades as possible in the hope that you are going to take the right trade, however, it leads to a lot of losing trades.
One of the biggest attributes a trader can have is patience, remember I’ve said previously, taking trades is actually a bad thing for your account because you want to protect your capital. The game is all about taking the right trade. The best way to overcome this particular issue is to have a trading plan.
Develop a trading plan that has a set of rules which takes away any ambiguity. Even if you think this particular asset is going to the moon imminently, by sticking to your plan you may not actually enter the trade, but there will be other opportunities around the corner.
The phrase “plan your trade, trade your plan” is one to remember. Once you have a trading plan in place you will find it will be much easier to manage this fear of missing out because you have a genuine reason for not entering.
Fears in Trading and How to Overcome Them
Fear of taking the wrong trades
This is very similar to other issues we have discussed but there is a subtlety. If you adhere to the rules around risk management and trade plan then if you take a trade and it turns out to be the wrong trade, for example a loss, then there is a great opportunity to learn from it.
Look at how that trade manifested, how it correlated with your trading plan, was there something you could do differently next time?
A trader should never base their success on simply winning trades, losing trades are just as important, if not more so, and you should be keeping a thorough journal of both.
Once you have this journal you can go back and look at tweaking your trading plan to maybe rule out this particular wrong trade in the future, maybe a moving average was in the wrong place, or you didn’t have RSI divergence or something.
It’s about adding additional filters to your losing trades to see if you can mitigate them further.
Hope this article has helped you understand some of the fears with regard to forex trading. Trading is a marathon and not a sprint, it takes time, but with proper processes you can be successful.