On the Fear of Being Wrong

 | Jul 21, 2013 | 10:30 AM EDT  | Comments
  • Comment
  • Print Print
  • Print

Picture this: Your trade has gone against you, and you're now sitting with a loss on the books. This was not supposed to happen! Now you have to make a decision -- so you cut bait and remove this albatross from your neck.

You should feel relieved yet, somehow, you don't. Instead, you feel remorseful and sad, as if a friend has just passed away. Even though you've gotten rid of the position, your head is not in a good place and you're psychologically stuck. Instead of thinking about the next play, you worry that any further trading will yield the same negative outcome. Your mind is completely twisted. How can you possibly make a trade when you are now convinced that next one will fail?

We've all been there, right? Nobody likes to be wrong, and the fear of just that is a natural defensive response to emotional pain. As a result, we'll often find ourselves too full of worry about the future -- since, after all, picking stocks, commodities, futures or options can be as much a guessing game as a round of blackjack. Of course, we can cut down the odds of being wrong by arming ourselves with good information, knowledge and tools. But, even with all of that preparation, a trade may still move against you. How do we reconcile ourselves with this?

Well, consider this: As an options trader, I expect to be wrong -- a lot -- and I'm OK with that.

In fact, I could lose 50% to 70% of the time and not even be too concerned. Why? Because losses are part of the game, and I accept it. Being right or wrong is not the main concern -- because the winners may far outweigh the losers, and it only takes one big, fat win to turn around your emotions. Heck, I've been wrong on trades and made money, and I've lost money on trades when I've been right. But here's the trick: You have to be willing to take that next trade!

I used to fear being wrong, too. In fact, there was a time when the pressure was so high that I would break my own risk-management rules as I tried to force a win or a positive outcome. I'm sure you know how that ended.

Thankfully, I've changed my behavior and I now keep myself humble. You just need to recognize that being wrong is far different from being reckless -- and that, in order to win in trading, you need to take some risk. I have never met anyone who has been able to produce a perfect trading record over a sustained period of time -- not even from a paper-trading account. It's simple math: The more trades you take, the higher the odds that one will go awry.

So, as I often say here, trading is not a game of perfect -- and you shouldn't let that stop you. Always treat each play as a separate event, and keep trading! More important, learn from the trade, and learn about yourself in the process.

One final note: For more on this subject, I recommend Mark Douglas' Trading in the Zone. This is one of my all-time favorite books, and it touches every area of the psychology surrounding trading. Take a look at it.

Columnist Conversations

Lang:
The first day of October brings us something a bit different, the worry seems to be less in the short term and...
Stocks are off to a rocky start to begin the fourth quarter as we have losses across the indices approaching t...
Don't know what the disparity of the two was when I bought GDX a year ago at $24.30. It looked like death warm...
TRUE is a name I have been stalking for some time now and I believe we are seeing a great entry here. The stoc...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.