How To Overcome Fear Of Loss In Trading (3 Tips And Hacks)

Last Updated on April 18, 2023

How to overcome fear of loss in trading is for many a huge obstacle that is hard to overcome. Fear in moderate doses is healthy, but it might also limit your trading if fear overtakes control of your decisions. Fear is good if it makes you avoid the risk of ruin, but if you have fear of loss in trading you might limit your trading.

How to overcome fear of loss in trading is mainly achieved by trading small, trading mechanically, and being ignorant to the market. Trading is all about good decision-making, and the less likely you are to make behavioral mistakes the better you’ll perform. Detachment to money and automatic trading reduce the chances of knee-jerk decisions.  

In the insight full book by Victor Niederhoffer called The Education of A Speculator, he writes that there are so many ways to lose, but so few ways to win. That is very true, and hence much of trading is about inverse thinking: avoiding the gravest mistakes gets you a long way.

There is an old proverb that says that the good is in the absence of the bad. In tennis, you can become very good by avoiding unforced errors. Charled D. Ellis wrote a famous article in 1975 called The Loser’s Game, quoted in Howard Mark’s The Most Important Thing.

Ellis’ article is frequently referencing a book by Simo Ramo called Extraordinary Tennis for The Ordinary Tennis Player. Ramo was both a scientist and statistician and studied tennis matches played by both professionals and amateurs. Ramo concluded:

In expert tennis, about 80 percent of the points are won; in amateur tennis, about 80 percent of the points are lost. In other words, professional tennis is a winner’s game – the final outcome is determined by the activities of the winner – and amateur tennis is a loser’s game – the final outcome is determined by the activities of the loser.

Amateurs lose by making too many mistakes and blunders, like double faults, hitting the ball too hard, or hitting the net. In amateur tennis, the best strategy is simply to return the ball in the least risky way and wait for the opponent to do a mistake. Hitting the net, for example, is called unforced error and is something being reported throughout any professional game in major tournaments.

What is the relevance of unforced errors to trading?

It’s important and we quote Charlie Munger:

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.

– Charlie Munger

It’s all about error removal and inverse thinking. Instead of looking at ways to win, Munger argues you can study the most common ways to lose, and then simply focus on avoiding them.

The best way to trade well is to trade like a robot with no emotions. The whole idea is to keep your emotions at bay.

Another method to keep emotions at bay is to develop checklists and make sure you have a rational framework for decision making, as pointed out in Annie Duke’s Thinking In Bets. Don’t focus on the outcome but on how you make decisions. A good decision can lead to a bad result, but the opposite can also happen. As long as you focus on the process and not the result you have come a long way.

What is fear in trading?

We suffer more in imagination than in reality.

• The Daily Stoic

Fear in trading has many forms: fear of losing, fear of missing out (FOMO), or fear of being wrong. A good trader balances all these risks and acts rationally under all circumstances. He or she tolerates stress and filter out external pressures. He or she most likely has a good trading plan.

Trading is about managing stress and fear is normal. However, as soon as you notice it interferes with your trading, you should address the problem.

Below we list what we consider the two most important ways how to overcome the fear of loss in trading:

How to overcome fear of loss in trading: Trade small

To be a successful trader you need to trade without fear. As you have already learned when you use fear as a resource to limit yourself, you will create the very conditions you are trying to avoid….The more fearful traders are, the fewer the choices they perceive as available to themselves and the easier it is to predict their behavior…..You need to stay focused on mastering the steps to achieving your goal and not the end result, knowing that the end result, money, will be a by product of what you know and how well you can act on what you know.

– Mark Douglas, The Disciplined Trader

The best advice we can give traders is to trade small. This is a “quick fix” to remove emotions from trading.

Why?

If you trade bigger than your comfort zone, you are less likely to follow your strategies and plans. You’ll make behavioral mistakes if you trade too big. Your backtests don’t include discretionary decisions and thus you have no strategy anymore.

What is a small size? A small size implies that you have detachment from money. If you have a loss, you are indifferent. This is extremely important when you start out.

Unfortunately, most of us have a tendency to become overconfident after a period of good results. Overconfidence in trading is bad.

How to overcome fear of loss in trading: trade mechanically

Our next best advice is to employ mechanical trading strategies. If you have done proper backtesting and out-of-sample testing, the job is done.

Your only task is to start and stop your systems with your trading software. This, and including a small trading size, is the key to mastering the art of the trade.

How to overcome fear of loss in trading: Don’t follow the market

Don’t follow every tick in the market. Turn off the screens – do something else while the market is open. Your emotions are more likely to get exacerbated by the market movements, and you are likely to override your systems.

Don’t set up multiple screens to get more charts, bells, and whistles. We day traded for 12 years via this Dell laptop (see our trading lessons):

How to overcome fear of loss in trading: Conclusions

How to overcome fear of loss in trading requires some simple tricks and tools. We recommend trading small, trading mechanically, and keeping a distance from the markets.

This is no rocket science, but your trading mindset could be just as important as your trading edges. The trading edge is by far the most important asset you have, and it’s important that your emotions don’t interfere.