Getting Over Trading Fears

It is often said that the market and trading is driven by just two emotions: fear and greed. Although it may be an oversimplification, it can be true to a certain extent. All traders, investors, and market timers, in all kinds of market, do feel fear at some level and when they do succumb to this emotion, it can have a detrimental effect on their portfolio and the stock market. Understanding the influence of fear and greed in trading and financial markets is important so that it can be overcome. Here, we will understand the importance of getting over trading fears.

Fear, “an unpleasant, often strong emotion, of anticipation or awareness of danger,” can affect the market because fear often affects investors' trading decisions. We are all human, thus it is only expected that we have human emotions even in market and trading. Emotions can overwhelm our decisions, especially when it comes to money, huge amounts of money. When stocks suffer huge losses for a long and sustained period, the market becomes fearful of sustaining more losses and therefore acts upon it, affecting trading. Trading fear can result to a mass exodus such as what happened following the bust of the dot com boom. To stem their trading losses, the investors quickly moved out of the equity markets and transferred to less risky investments and trading such as money market securities, principal-protected funds, and stable value funds. These were all low-risk and low-return securities and trading. The year 2002 saw the largest outflows since 1988, one of the worst stock crashes in history. It had an outflow of about $40 billion and $140 billion flowed into the bond market trading, making it a record high.

As a result of fear, a long term investment plan can be scrapped to switch to low-risk, low-return investments that can tear a hole in an investor's portfolio. Being too fearful can be as costly as being too gray. To be successful in trading and to create profitable market timing, we need to learn how to prepare ourselves in handling fears and the risks involved in trading. Trading fears can come from too much expectation, of believing you know what is going to happen next. We often forget that trading is a probability game and when we get too high or too low, this causes us to react emotionally through fear or greed. The more important an individual trade is in your mind, the higher the level of fear becomes. You then become anxious, cautious, and more hesitant in your decisions because you fear to make a mistake.

Winning market timers manage their fear while losing timers can't help but be controlled by it. The instinctive trading tendency is usually the “fight or flight” response. The winning market timer decides to do battle against the danger perceived and the losing market timer decides to flee from the danger. In some cases, the investor who is aware that the fear or stress experienced can affect his or her decisions, the tendency is to “freeze” and the performance is often impaired. In confronting fear, you need to be decisive and stick with your strategy even at times when fear holds you back.