This Is What Happens To Traders Who Are Controlled By Their Fears

Read this to learn strategies to overcome and allay the three costly fears every trader and investor faces.

Have you wondered why past events in the markets seem to clear and obvious only to feel conflicted and confused when those same opportunities are presented in real time? 

This is a common issue that traders and investors face. 

If left unresolved, traders will struggle with unplanned losses and missed profits; ultimately preventing them from experiencing consistent income and growth from their hard work.  

The main reason why past opportunities are easy to see and current opportunities are not is because of fear.

Looking at historic information only involves logic. There isn’t anything you can make or lose from it directly, so there is nothing to fear. Many traders and investors find the process of researching historic market data to be boring; and would rather just look at live data which is far more exciting—but also can lead to fear.

We’’ll specifically talk about two fears you face while looking at live data—and a third underlying fear that, if left unchecked, can destroy your trading and investing career no matter how smart you are, how much information you have, or how hard you work.

Although you have likely heard of these types of fears before, I ask that you read on so that you can fully understand both the consequences and solutions that can help you allay and overcome these fears moving forward.

After we cover the three fears that traders and investors face—we’ll discuss three solutions you can implement right away to avoid being controlled by these fears and improve your ability to generate consistent income and growth in your account.

Fear Of Loss

Because every trade and investment includes risk, there is a chance of losing money. 

This immediately brings up a problem that needs to be addressed: The pain we feel from losing often outweighs the pleasure of winning. You may have heard this referred to as Loss Aversion first coined by Amos Tversky and Daniel Kahneman. 

When facing an opportunity in real time, past experiences trigger emotions of both pain and pleasure as we think about the potential risk and reward. 

And ultimately, even though the math says the reward outweighs the risk, your emotions do not balance out the same way. 

This leaves you conflicted. 

Your mind sees more reward than risk, but your body feels more pain than pleasure. Without proper self reflection, your emotions will dominate and overpower your hard work and logic and you’ll skip the position or put on a significantly reduced size to alleviate the pain while simultaneously sentencing your account to mediocre results at best. 

If you catch yourself seeing great risk reward but finding reasons to skip the opportunity, it’s best to label this an asymmetrical emotion or unfounded fear. Then, focus on stirring up a different type of fear. 

Yep, we’re going to use fear as our ally. Fighting fire with fire—or fear with fear in this case.

Instead of the unfounded asymmetric fear of loss, we’re going to focus on what happens if we don’t execute opportunities that have asymmetric reward in the long term. 

The natural tendency is to fear what might happen this time

When you feel this happening, ask the question: Where will I be in 5 years if I continue to avoid good opportunities?

Then imagine yourself in the future looking back at charts and regretting trades that you skipped which would have been profitable for you. To avoid this feeling of regret, you must take action now. 

Fear Of Missing Out

This is classic and often referred simply with the two-syllable acronym: FOMO. 

With Fear of Loss, you are tempted to skip opportunities or reduce size. With FOMO, you are putting capital at risk (or leaving capital at risk) where it has no business being. 

You may recognize this happening when you become aware that something big is happening and you rush to figure out how to get involved. This can happen if you are following along with the excitement (buying a high flying stock that just gapped up) or going against the flow (buying a stock that just dropped 40% for no apparent reason.)

Once in the position, the Fear of Missing Out can quickly turn into Fear of Loss as you reflect on your new position and the reality that you don’t know enough about it. 

While we’re calling this “Fear” of missing out. The simpler term is Greed. You see something that isn’t yours (an opportunity unfolding that you aren’t in) and you want to get involved without the appropriate amount of work and preparation. 

The worst thing that can happen is for you to be rewarded for this because that will positively reinforce a poor decision making process that will eventually lead to significant losses. 

To be clear, there is nothing wrong with quickly adapting to new opportunities. Some of the best traders I’ve known would get into positions within seconds of hearing about them. They would buy large positions in stocks they had never heard of before. 

The difference is that they spent countless hours studying how to do this with other stocks. 

Fear Of Failure

This is an underlying fear that weighs on traders and investors during seasons of losing especially if they haven’t experienced their first season of winning yet. 

Fear of failure is different from the first two types of fear we discussed because it includes a social component. 

Society tells us to leave investing to the “professionals” (although we know that most of these professionals are just glorified sales people for large institutions that dump everyone into the same products while siphoning out most of the profits through fees while taking no risk of their own.)

Handling your own account goes against the traditional advice we receive from these professionals; and that is why society labels independent trading and investing as risky. 

Believing you can do it and then having to openly admit to your spouse, friends, parents, etc. that you couldn’t cut it as a trader is a very painful idea—even more than the pain of losing money. 

This fear often drives traders and investors to constantly change their entire approach and strategy. They aren’t seeing results in one approach, so they switch to another. 

Strategies are no different than mutual funds for this next point. It has been proven time and time again that mutual funds with the best 5-year returns are randomly distributed throughout the ranks in the next 5 years. 

Trading systems are similar. Some strategies have amazing results for 1 year, 3 years, even 10 years. Those strategies are just as likely to underperform over the next 5 years as one that was underperforming previously. 

Knowing this, I’d almost go as far as suggesting that you find strategies which have recently underperformed and use those instead. Perhaps that would be worth your time to study rather than looking for what is doing great right now.

Here’s the good news. 

These three fears don’t have to control your actions. You can overcome them with some simple strategies. 

Ready? Write these down and get ready to put them into practice.

#1 Be Poised

Imagine your emotions as a pendulum. You swing back and forth between pain and pleasure, optimism and pessimism.

You cannot just stop the pendulum in the middle when it’s about the cross over to the negative emotions and then expect it to swing all the way to the top of the pleasurable emotions. 

Wouldn’t that be great though? Your bad days trigger no emotional reaction and your losing days are full of excitement and elation? This is the unrealistic utopian experience that traders dream about. 

The real solution is to reduce the amount that the pendulum swings altogether. Ultimately your goal is to not notice any emotional reactions to short term results and—instead—find a steady, consistent, emotional state that is balanced. 

In the past, I have called this Nonchalance. I have updated to using the word Poise instead—inspired partly by legendary Coach John Wooden’s use of the term.

When you are poised, then both bad days and good days do not create any significant emotional reaction. 

It’s not that you want to become an emotionless robot who feels neither pain nor pleasure. It’s that you do not want to derive pleasure from short term results that you cannot control. Instead, your pleasure is derived from taking the right actions in the face of both positive and negative results. 

When your pleasure and satisfaction are in the process, not the short term results, then long term positive results are more likely to be realized—because fear driven, self sabotaging actions are not getting in the way. 

#2 Gratitude 

Both the fear of loss and the fear of missing out come from a perspective that sees the world having limited opportunities vs. abundant opportunities. 

If you fear losing $1,000 because you don’t believe there is a way to get it back, then you will not want to risk $1,000. But if you believe you can take that loss and get it back with more opportunities that will come later, then you can build the confidence to take that risk. 

So, how does gratitude help you see an abundance of opportunity? 

Gratitude is the practice of reviewing and listing out all the good things that you ALREADY have. This includes non-financial things, financial things, accomplishments, relationships, etc. 

When you can review all the good things that have happened in the past, it’s easier to believe that many more good things are available now and in the future. 

This gives you the confidence to take a risk now because it’s small compared to what you already have and even smaller compared to what is possible in the future. 

Without this perspective, your focus will be on the one risk you are taking now. 

The very act of “focusing” means everything else is out of focus. When you focus on the risk you are taking, then it’s hard to see the big picture of the rewards available for that risk. 

Practicing gratitude helps you to see small risks as just that; small.

#3 Evidence 

Most traders and investors see opportunity with very little evidence. 

During a trial, the jury is trying to decide if they need to convict a criminal or free a falsely accused citizen. To do this, they need evidence. The more evidence they have, the more confidently they can make their decision. 

If you want to reduce the amount of fear you have about making poor decisions, then you need to have a greater body of evidence to support your decisions.

Gathering evidence, sorting through the data, and designing actionable trading plans is hard work. 

And that is why we built our community. We relentlessly gather evidence, put it to the test with real money, and share it all with our community of traders and investors. 

If you would like to decrease fear, increase confidence, have more poise, build your library of strategies backed by evidence of success, then I have an invitation for you. 

I invite you to watch this free presentation about creating consistent income and profits with risk-adjusted returns that are up to 10x the stock market. 

This is a totally free presentation. You don’t even have to give up your email address.

-Andrew Falde