TPS E21: Why understanding FEAR is the solution to all your trading problems?

Many times we can sabotage our own trading because of our fears. In many cases, fear is good and helpful in our lives. But in trading, it can really be harmful.

Fear helps us avoid things in the environment that we perceive as threatening. It’s important to note that what we perceive as threatening may not necessarily be threatening. We just perceive it as threatening. And as far as our minds are concerned, it is a real threat.

A good example is offered in The Disciplined Trader. A child severely bitten by a dog will quite naturally associate all dogs with the threat of pain, and consequently generate an intense fear or even terror whenever he encounters any dog in the future. The child’s fear of all other dogs other than the one that bit him is real. He has no way of making a distinction between a friendly and a dangerous dog because his personal experience leads him to believe that all dogs are dangerous. That is his truth about the nature of the environment. However, his truth is not all the environment has to offer in the way of experiences in relationship to dogs. Not every dog that exists is dangerous. Quite the contrary, very few would be considered threatening; most see a child and want to play.

Now, in every chance encounter the child has with a dog in the future, he will create an experience of terror, regardless of the disposition of any particular dog he happens to run into. If a dog makes any movement toward the child, the child will perceive that movement as an actual attack when all the dog wanted to do was play or be petted. In fact, the child could become so afraid of being attacked that he will devote most, if not all, of his attention to scanning the surrounding environment for dogs. Eventually, his senses will become attuned to picking up their sights and sounds, and every time he sees or hears one, he will create another terrifying experience that just reinforces his fears. His focus of attention will attract to his attention the object of his fears so that he can avoid what he has learned is threatening. The problem is that what he has learned is erroneous in relationship to the conditions that not all dogs are dangerous. Not knowing that, he will naturally believe that his terror is coming from outside instead of inside him. In effect, his fears are acting on his perception to create the very experiences he is trying to avoid by causing him to hone in on all the dogs in the environment.

Do you see how the fear of the young child could be similar to the fear that we could experience during trading? When we focus on our losing trades, mistakes, etc., we give our subconscious mind powerful directions. We could then easily end up with those same losses that we are trying so hard to avoid. What we focus our attention on is usually what we get. It’s not necessarily as easy as focusing our attention on winning trades and proper trading mechanics to get us to be successful. But it’s not that far off either.

You see, if you do continually focus (intensely) on your mistakes and poor trading decisions, you are more likely to end up with more of the same. Your subconscious sees the mental pictures you are giving it and acts out on the directions that it is receiving from you. That is how the subconscious works. It takes the mental pictures that you give it (like worrying about getting bit by a dog, or worrying about trading mistakes you’ve made in the past) and does its very best to act out these directions on your behalf.

Your subconscious does not care if you are giving it directions that are not in your best interest. It simply attempts to follow the information it is given regardless of whether or not is really helpful or not. Just like in the dog-biting example, the child sent directions to his subconscious that all dogs are threatening to him. Two things are important here. The first one is that the information is not necessarily true, obviously not all dogs are threatening. In fact, most are fun to play with and would be very enjoyable for the child. And the second important thing is that this information is not helpful to the child (obviously the child would be happier if he were able to have a friendly relationship with most dogs than to be afraid), but nevertheless, as far as the child is concerned, the information (that all dogs are threatening) is very real and true.

There are still other ways our fears cause us problems in our trading. Remember our fears act as a warning mechanism to help us avoid what we believe to be threatening. One way many people do this is to avoid information that would be threatening or against our current opinion. Instead of clearly seeing all the different pieces of information that would help us make good trading decisions, we do just the opposite. We ignore important pieces of information that would be threatening to us. When trading, this can be very, very dangerous and it will never help us act in our own best interest.

When we trade with fear, we can easily block things out. For instance, if we are in a trade and the market is offering us information that would indicate we are right or information that would indicate we are wrong, what information do you think we will focus on? We obviously put a lot of weight in the information that will make us right and many times ignore the information that is telling us of other possibilities. This kind of thinking can be very dangerous for any trader because, after a while, the threatening information can become so overwhelming that you can simply not ignore it any longer. The only way to relieve the stress and anxiety will be to get out of the trade.

A winning trade will be handled in the opposite way by a fearful trader. His fear of losing will cause him to focus on what the market can take away from him in his current winning trade. Remember, in a losing trade, the fearful trader will focus on only the information that supports his current position and ignore other factors that may not agree with his opinion. But in a winning trade, the fearful trader will do the opposite. He will ignore any information that states the market has potential to continue in a profitable direction. He will be so focused on information that will confirm his fears of the market taking the profits away, that he will exit the trade early regardless of the profit potential left in the trade. And it gets even worse if the market does go his way after he exits the trade. He finds it very easy to agonize over why he couldn’t stay in the trade a little longer. He certainly doesn’t realize that it was his fear of losing that caused him to get out of the trade and leave that money on the table.

These are the main reasons why most traders cut their profits short and let their losses run. In a winning trade, a fearful trader will focus his attention on information that the market is going to take his profits away. And in a losing trade, a fearful trader will focus his attention on anything other than what would indicate this trade is a loser.

Obviously, this fear will sabotage your trading because it causes you not to act in your own best interest. To prevent it, we must learn to trade without fear. To trade without fear, we need to completely trust ourselves to know we will always act in our own best interest.

So to be successful, you need to focus on different things than the majority of traders do. Letting your losses run and cutting your profits is what most people do. You need to do the opposite, and to do it you need to change your thinking.

Apply what you learnt in Episode 1 to 15 of this Trading Psychology Series (TPS) and you will be successful.! All the best.!