Emotional Trading: understanding Fear
The psychological makeup of each trader has an enormous bearing on whether or not success in the marketplace is achieved, or even remotely possible. Managing one’s emotions when confronted with market-induced adversity presents many challenges to the active trader and is a critical aspect of performance.
Fear and greed are the two emotions that exert the most influence upon an individual’s performance in the marketplace. Automatic emotional responses, such as these two, have been scientifically shown to “short-circuit” the more complex decision-making processes involved in active trading. Unless properly addressed, fear and greed can be drivers of emotional decision making and directly responsible for preventing the consistent application of sound trading methodology.
Fear functions as a security device and is an important part of survival. Conversely, in the trading environment, fear proves to be a performance inhibitor.
In the arena of active trading, there are two classifications of fear, each with unique negative impacts upon trading performance:
- Fear of losing money: In forex, fear comes from the increased possibility of losing money, which can happen anytime for a trader. Even if experiencing fear is normal you think to yourself that you cannot handle it anymore, and do not want to lose more than you already have.
- Fear of Failure is the fear of being wrong and associates personal self-worth with the result of a losing trade and loss of capital. As a result, increased pressures brought on by perfectionism in addition to the unwillingness to execute trades in apprehension of loss are common problems related to a trader’s fear of failure.
- Fear of missing out: is the missing out on a big opportunity in the markets and is a common issue many traders will experience during their careers. It often stems from the feeling that other traders are more successful and it can cause overly high expectations, a lack of long-term perspective, overconfidence/ too little confidence and an unwillingness to wait. If left unchecked, these emotions can lead traders to neglect their trading plans and exceed comfortable levels of risk.
- Fear of success: Fear of success is a bit more difficult to comprehend, as it runs counterintuitive to most people’s views toward achievement. As silly as it sounds, the fear of success is as real as the fear of failure for some forex traders. With success can come higher expectations and this builds pressure on the trader to perform better than the last time. For some people, this is enough to keep them from even trying. Self-sabotage and giving back profits, known as “donating” to the market, are performance detractors that arise from a trader’s fear of success.
Without a mechanism by which to manage fear and the resulting anxieties, a trader is likely to experience high stress, inner conflict and an overall negative experience in the marketplace.