In trading, the fear comes from the increased possibility of losing money, which can happen at any time for the trader.
Feeling afraid is normal, as fear is a basic survival mechanism.
Without fear, we would not be able to recognize danger and respond to it appropriately.
The problem with fear comes when we allow the perceived risk of being stopped out of trading or losing money to scare us into making a decision that goes against our good trading habits and the trading plan we have previously defined.
Let’s say you are holding a long position on the EUR/USD pair. You bought it at 1.0850, and the price is currently at 1.0835, so you lost 15 pips.
Your stop is at 1.0790, just below the support level at 1.0800. At this point, you are feeling very nervous and scared, especially since your last trade was a loss.
Simply put, you feel afraid.
You think you can’t handle it anymore and you don’t want to lose more than you’ve already lost.
Closes early.
Can you guess what happens next?
The support holds, then the price goes up a few hours later. Your fear caused you to irrationally close a valid, high-probability trade!
You have to find a way to use these negative emotions to your advantage, or as Brett Steinberger, author of The Power of Positive Thinking, puts it: Day Trading CoachPut it on – Make fear your friend.
Because fear is warning you that something doesn’t feel right about the trade, you should try to figure out exactly what’s wrong. Ask yourself the following questions:
- Why do I feel uncomfortable?
- Is it just because I’m afraid of losing?
- Or are there fundamental or technical factors that are pushing me to exit this trade?
Once you identify the reasons behind your fear, you can use them to make better trading decisions.
If you are able to analyze the roots of your fear, you can go back to your trading plan, which will help you determine what you should do in this scenario.
Let’s go back to the long EUR/USD trade I mentioned earlier. Let’s say you hear news that members of the European Central Bank have expressed support for interest rate cuts several times this year. This makes you feel uneasy about your long EUR position, so you feel fearful.
Now, there is a change in the fundamental landscape and an increased possibility of losing trades, so it may be better to exit your trade even before it hits your stop.
Once the price drops below the support at 1.0800, you will congratulate yourself for recognizing a valid change in the environment rather than closing your trades out of fear alone.
For those who need their own checklist, here’s the short version:
1. Embrace fear
Fear is part of human nature and everyone experiences it, so embrace fear and focus on dealing with it.
2. Identify the source of your fear.
Did the funny twinge in your stomach come from valid reasons like a support break and a change in market sentiment, or was it just because you had a nightmare about your trades the night before?
Learn how to distinguish between good fear and irrational fear so you can focus on acting on it.
3. Use fear to make better trading decisions.
Once you identify the source of your fear, make the necessary changes in your trades. In this way, you have turned your fear into an area for growth and improvement.
As top trading coach Brett Steinberger says, “Confidence is not the absence of fear, but rather knowing that you are capable of performing your best in the face of stress and uncertainty.“