Dealing with Fear of Loss Like a Professional Trader
The fear of loss is one of the biggest of four primary fears among traders. I am going to write a series of articles to discuss each one of them and how to prevent them from inhibiting your success.
Grab something you can write on and a pen, and find a nice cozy area free of distraction. We are about to deep dive into your past and help you solve one of the fears in trading that can ruin you financially and emotionally. Write down answers to all of the questions that I ask, even if they seem to be rhetorical.
Fear of Loss
This is a fear that all traders have dealt with in the past, and the majority will continue to for as long as they live. In society we associate fear with weakness. But, there is no harm in fear – in fact, it is our body’s mechanism for avoiding danger. The fear of loss can go very deep, and we are about to follow the rabbit hole and dig up some raw feelings. Reader beware.
What about a loss do you fear? Is it the loss of purchasing power as a result of losing money, or is it the fear of losing control? In short, is it emotional or monetary? Think about this carefully, because in the end it will be one of the two. Write down which one better explains you.
When you suffer a loss are you freaked out about the fact you did not prevent the outcome? If yes, you are struggling with loss of control. Here is a very simple exercise I use with my trading students. Take your index finger and press down the “Ctrl” key on your keyboard and hold down the key. Now repeat after me – “this is the only thing I can maintain constant control of in my life”. Now release the key and keep reading.
Think back to your last monetary loss, was the money you lost money that you could not afford to lose? Was it money that paid for your necessities? If you are trading with capital you rely on for your survival or well-being, you can never eliminate the fear of loss and you are putting yourself at a disadvantage. Under-capitalized trading accounts are one of the key contributors to fear of loss. The less you have the more worried you are that you will lose it all quickly. Try to trade with money that you can afford to lose and it would not change your lifestyle dramatically. Save until you are ready and you will have less fear of loss.
Now that you know your type of fear of loss, think back to when you taught yourself to be afraid of loss. Was there an experience that stands out that actually makes you cringe at the thought of loss? This could very well have been the passing of a family member or a loved one. This could also have been a time you took a risk with your career or even life, and it did not work out as you had hoped.
This can be losing the championship game in sports, making a gamble on an event or probability which caused you significant loss, or one of limitless other possibilities. Just keep writing, open up your heart and let it pour out on that piece of paper, because these memories are better fresh in our mind than forcefully pushed aside and forgotten. These memories are what will help us get through trading losses as well.
Now that you have a few fresh examples of moments you were flush with fear in times of loss, it is time to look to the solutions. How did you solve your fears of loss previously? The loss of life can be devastating, and will only torment you less once enough time passes to help you cope. Go back to the losses that were not the most severe but have impacted you to this day. What did you do to move overcome them and move forward? Write it all down.
Acceptance is the precise point at which you decide to stop dwelling on the past and start focusing on the future.
This is a critical aspect of trading. Face it, you will lose. In fact, if you do not lose you are lying to yourself or doing something illegal. But there is a difference between a normal loss during the course of regular business and a loss due to an irresponsible decision. As a trader, you should embrace the first type, and avoid the second like the plague.
Learn to Lose
I have personally written out a few phrases you can repeat out loud to teach yourself acceptance of trading losses:
“Losing is a natural part of trading. It is part of business, it is part of life. I will lose, but as long as I do not give up I will win!”
“Losses are tuition payments for the education you are receiving.”
“Losing money, but gaining experience.”
“Losses do not scare me. Losses keep me focused on managing my risk.”
“The success of tomorrow is founded on the failure and loss of today.”
Get it? Got it? Good! Print the above phrases and pin them by your trading monitor, read them out loud each morning. This is a good acclimatization tactic I used in the first few years of my trading career.
At this point it is also very important to mention that as humans, we can not entirely eliminate the fear of loss, nor should we try to. What we want to do instead is filter false fears and act on them before they start creeping up into our trades subtly. If you do not know how to overcome losses, you will never know how to trade. If you follow the steps in this article, and answered honestly to all of the questions, you are well on your way to overcoming one of the crippling fears of trading!
I will leave you with a little exercise I want you to try for yourself:
- Think of one stock that you have lost money trading.
- Pull up a chart of a stock which is a direct competitor to the company you actually traded.
- Scroll the chart horizontally to the right so you do not see the last year of price action.
- Click one day at a time to reveal the price and TRY to purposely LOSE every trade!
How many trades actually ended up being winners? What percentage were losers? How much money would you have made/lost in total for that year, with your account balance size?
Here is my offer to you – if you can consistently lose trades at a rate of 80%+, let me know and I will immediately hire you and pay you a six figure salary starting today. (Then program your trading software so it reverses the buys and sells and we both make millions!)
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