Conquering Your Negative Trading Emotions

by  John  Prow  

The trader has two emotions that must be controlled in order to become successful. I call them ‘the two sides of a coin’ and they are commonly known as FEAR & GREED.
The beginning or new trader will first encounter FEAR. There are two types of FEAR. The fear of losing money and the fear of being wrong.
The fear of losing money usually derives from a trader risking money that should be used for the rent, food, children’s education etc. ‘Scared money’ will render one incapable of pulling the trigger when a trade setup comes along. The only way to overcome this paralysis is to be well capitalized with funds that you can risk.

The fear of being wrong is simply that part of all of us that feels that to make a wrong decision is reflective on our personal competency. The cure for this is to simply realize and accept that losses are part of this game. Think about this? A baseball player needs to hit the ball once for every three times at the plate and this will get him into the Hall Of Fame. Whenever you feel the fear of being wrong, just remind yourself that… "My approach for trading has both historically and real-time produced over (number)% winning trades." This will give you the confidence to step up to the plate and keep swinging. Also tell yourself that the only way to earn the big money is to get into the game. Have confidence in your trading system that when properly executed, it will make much more money than it loses.

So, why is GREED the flip side of fear?
Greed is caused by the fear of not making enough money. Traders who are greedy are often the exact opposite of the ones who are fearful. They have no fear and usually are very aggressive traders, which can get them into big trouble fast. Greed will usually lead to overtrading, failure to follow the trading rules, and not applying the system consistently. One of the biggest problems when greed sets in is the inability to know when to take profits. These traders are so bent on making a killing that they are never satisfied. If they have significant profits they don't even think about cashing out, as they want more. This often leads to the inability to see the trade turning against them and they will allow winning trades to turn into big losing ones.
One solution is to realize that making significant profits on a regular short time basis adds up quickly. This is best combated by developing or buying a sound system and executing the system flawlessly. Once you become confident in your system, you will no longer feel like "going for broke" because you know that there is always another good trade about to come along.

Nothing can sabotage your trading skills and profits like fear and greed. If they are a part of your “trading personality”, then you must address them immediately. Here are some of the traits that you need to identify and work to overcome:

Indecision: This includes the inability to make the trade or also known as “pulling the trigger”. Another area that indecision causes is the tendency to ponder too long on whether or not to make the trade. Often the trader will wait so long that they miss the trade completely or they will enter near the end of the move and end up in a losing situation.
Poor judgment: Fear can cause this problem because it can make you trade with your emotions, resulting in irrational decisions. This is the exact opposite state that you want to be in which is a calm and unemotionally attached one.
Inability to exit a bad trade: Fear can cause you to freeze up and not take action.
Inability to stick with a winning trade: Fearful traders will tend to exit the trade the minute they are up a few dollars. They are so concerned with being right or not losing that they figure that they are better off to take a small profit. Meanwhile this results in them missing the really big payoffs.
Exiting trades prematurely: In this instance the trader enters a position and then it starts to move slightly (notice I said slightly!) against them and they panic and exit the trade. The market then moves in their favor and they become angry and frustrated wondering what made them bail out of a good trade in the first place.
Stress: Trading is not easy as nothing is ever certain and risking money always adds to the stress levels. However, fear can amplify the stress many times, which in turn makes it hard to trade with a clear and focused mind. Ultimately it makes something that is already difficult even more so.
Lack of discipline: Fear will induce this state because it causes irrational and emotional decisions, which wreck havoc with the trader’s “game plan”.
Overtrading: In an attempt to get rich, some individuals will tend to trade way too often and buy more shares than proper money management would warrant.
Creating unrealistic profit outcomes: In this situation the trader never knows when to take profits because they are convinced the market will go their way forever. The reality of this scenario is that they end up giving back most of their profits as their greed blinds them to market reversals.
Throwing caution to the wind: In this case the trader fails to do their homework before they make the trade. Instead they go “with a hunch or hot tip”. Others will just see a stock that is on the run and jump in without thinking.

Tips for Overcoming Fear & Greed
1. Only trade with money that you can afford to lose.
2. Set realistic goals and realize that the tortoise wins the race. You will not turn $5000 into $1,000,000 in a year.
3. Work your plan. Practice being disciplined. Limit your loses, let your profits run.
4. Adhere to strict money management rules. Don’t risk too much on any single trade, you will encounter a string of losing trades and must have money to stay in the game.
5. Take periodic breaks from trading.