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

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 insightful 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.

An old proverb 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 frequently references a book by Simo Ramo called Extraordinary Tennis for The Ordinary Tennis Player. Ramo was a scientist and statistician and studied tennis matches played by 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 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 without 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 filters out external pressures. He or she most likely has a good trading plan.

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

What is the definition of fear?

The Oxford Language defines fear as:

An unpleasant emotion caused by the threat of danger, pain, or harm.

What triggers fear is the threat of harm. Harm can both be physical, for example by being beaten up by a brute, or psychological in the form of threats. The threat can both be for real or illusionary. In trading, the threat is normally about money.

What is a good trader?

A good trader is someone who acts rationally under all circumstances. He or she can tolerate stress and filter out all external pressures. A good trader can manage stress in a good way, but more importantly, he or she has a plan on how to deal with fear.

Thus, fear in trading can have a very negative impact on your performance.

Is fear good or bad in trading?

I like to call myself a fearful trader. I have a constant fear of losing money. This has cost me a lot of opportunities, but highly likely saved me a lot of losses. It has made me survive and evolve for two decades.

But is fear good or bad in trading? It all depends.

Personally, I believe a certain level of fear is crucial for surviving as a trader. All the surviving traders I know are more or less like me, but perhaps not as fearful and “paranoid”. Fearful traders protect their capital and “fear” losing it. That should be any trader’s primary goal. You must protect your capital to survive and get experience. By getting experience it’s also much easier to survive in the future.

What kind of fears are typical in trading?

There are many types of fears in trading:

The fear of losing

The fear of losing is most likely the most typical obstacle for most traders. When you are facing an unknown future, you have no idea if your actions will lead to losses or gains. If the focus is on how much you can lose, you might hesitate and don’t take the trade.

The fear of being wrong

Most people like to be right. However, in trading, you can be wrong 50% of the time and still make good money. Warren Buffett is among the planet’s richest men, but he is surprisingly wrong very often. What makes him successful is his rational mindset and patience (he is long-term).

The fear of missing out

Social media make you fear missing out: You see a lot of activities that you would like to participate in. The same happens in the stock market when the market goes up. The fear of missing the bull ride makes many you giving in at the end of the bull market. The fear of missing out is a very powerful force.

How to overcome fear of loss in trading: Trade small

The best way to overcome fear in trading is to trade small. This is a “quick fix” to remove emotions from trading.

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

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 detachment from money. If you lose, you are indifferent. This is extremely important when you start.

Unfortunately, most people tend 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. The job is done if you have done proper backtesting and out-of-sample testing.

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

To overcome fear you can’t follow the markets. 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):

Fear in trading – a personal experience

I consider myself a pretty fearful trader:

  1. I double-check all that can go wrong. I believe in Murphy’s law (all that can go wrong will sooner or later go wrong -it’s just a question of time). I do make errors, but this has saved me a lot of money over the years. Unfortunately, trading involves risks that you only learn by trial and error. You possibly can’t understand all the risks before it’s too late. Black swans are inevitable.
  2. I try to have as low living costs as possible. One of the reasons why I own real estate is because I want to have a “passive” income if my trading goes nowhere.
  3. I’m not making as much money as I could. That is fine. My aim is survival.
  4. I diversify a lot. I invest for the long term in stocks, commodities, and real estate. Among all these, I diversify my trading strategies.
  5. My fear has put me out of great opportunities. Usually, after a bad day or bad period, things turn around. The best days “always” come after a bad period. To avoid changing exposure due to behavioral biases, I make sure I control my losses and know my limits. It’s easy to give up trading or a strategy at the exact wrong time. That happened in 2007 when I had my biggest loss ever. The very next day was the best trading day ever, but unfortunately, my fear made me scale back as much as I possibly could because of the losses from the previous day.
  6. I always have a plan B. Any day regulation (or market change) can put me out of business.

How to overcome trading fears – a personal approach

Fear is normal, as long as you can control it. However, as soon as you notice it interferes with your trading, you should address it.

How do you address fear?

I suggest writing down your fears. What are you afraid of? Is the fear rational or is it illusionary?

When you have clearly addressed your fear(s), write down how you can deal with it. Writing is a very powerful tool and forces you to think. If you’re serious about trading, you will most likely be rewarded for taking the time for doing it.

Here are some additional notes that might be helpful:

  • Employ mechanical trading strategies to avoid human interference.
  • Experience is a good teacher. You will always learn something new every day.
  • Never be too confident. You have never seen it all, and you never will. Overconfidence and ego have been the downfall of many traders.
  • Being right often doesn’t necessarily lead to more profits.
  • If your fear is about losing, write down what you believe is the worst scenario. How much can you lose?
  • Be sure you have a lifeline in the form of savings.
  • Trade many uncorrelated strategies.

No fear often leads to overconfidence

Having too much confidence, overconfidence, is traders’ worst enemy. Victor Niederhoffer keeps a picture of the “unsinkable” Titanic in his office to keep him humble (he still managed to “blow up” twice). The bottom line is that a fearful trader will always protect his capital. A fearful trader might not make the most money, but he will be around for a long time. Trading is about surviving and removing errors and behavioral mistakes.

However, too much fear has its downsides: one is, as mentioned, missed opportunities. Perhaps a bigger drawback might be

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 as important as your trading edges. The trading edge is by far the most important asset you have, and your emotions mustn’t interfere.

FAQ:

– Is fear good or bad in trading?

The impact of fear in trading depends on its intensity. A certain level of fear is deemed crucial for a trader’s survival, as it encourages the protection of capital. The article discusses how fear, when appropriately managed, contributes to long-term success.

How can fear of loss impact trading decisions?

The fear of loss in trading is a significant obstacle that can limit trading decisions if not managed properly. Excessive fear of loss can lead to limiting trading activities and decisions, hindering the overall performance. Detachment from money is crucial, especially in the face of losses, as it ensures indifference and helps traders maintain a rational mindset.

How does trading mechanically contribute to overcoming fear in trading?

Mechanical trading strategies, backed by proper testing, reduce the need for emotional decision-making, fostering a more systematic approach to trading. Trading small helps remove emotions from trading, as larger trades may lead to behavioral mistakes and deviations from trading plans.

How can traders avoid being influenced by market movements?

Avoiding constant monitoring of market ticks and turning off screens can prevent emotional reactions to market fluctuations and help traders stay focused on their strategies.Trading a size that aligns with comfort zones prevents over trading, behavioral mistakes, and ensures adherence to trading plans.

– Why is trading stressful, and how does it relate to fear?

Trading induces stress due to the uncertainties associated with both losses and gains. Fear of missing out (FOMO) and fear of losing contribute to the stress in trading. The article discusses the challenges of detaching from the emotional aspect of money in trading.

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