After a strong year when markets were up by double-digit percentages, many traders may feel a bit left behind. Will 2020 follow up with some solid gains or has the window of opportunity closed for now?
While a fresh and positive outlook in a new year is always good, it's important to remember that there is one thing that is very difficult to change -- your emotions. Try as you might to check your emotions at the door, there is often too much going on to just be emotionless. When money is on the line, fear and greed sneak in. We are all wired this way; there is no escaping it. But if you can manage your emotions, you will become the best trader possible.
And that's where the four fears of trading come in. The late Mark Douglas outlined the different stages we all suffer from when trading (and actually, in life) in his book "Trading in the Zone."
The four fears are Fear of Missing Out (FOMO), Fear of Loss, Fear of Being Wrong and Fear of Letting a Win Turn into a Loss. Conquering these fears is incredibly difficult, but managing them is a must.
I'll cover all four fears of trading in two separate posts. Let's take a look at the first two.
The Fear of Missing Out
This is the one that causes the greatest pain and heartache for most investors. While nobody wants to miss the party, it seems all too often we yield to our fear of taking risks, which leads to eventual regret. If I told you markets had a track record of going up all the time (not true, but for some it seems that way) you probably wouldn't believe me. But what about keeping on the sidelines when the conditions are ripe? The constant knot in your stomach does little to soothe the pain.
The emotion of regret stings more than anything, especially when others around you are winning. Nothing is more painful than sitting on the sidelines and missing out on the excitement. "I am supposed to be in the game; why am I not in the game?" Fear of losing is so overwhelming that you freeze, totally paralyzed, afraid that you'll be late to the party.
We have all felt this way. When markets are running higher, you want to kick yourself for missing out, especially when it seems too obvious.
The Fear of Loss
You mourn the loss of loved ones, crushed relationships and losing sports teams with different degrees of pain. In trading, you mourn the loss of precious capital and fear taking risks in the future. As humans, we abhor pain, and a loss will only bring on more of it.
Along with the fear of missing out, this one stings and tends to keep you out of the market. It's a sort of cause and effect. You fear a loss, and once you have one it leads to missing out, and we all seem to fear that one the most.
But losses are part of the game, and once you accept that you can rise above this fear. The key is moving on and not reflecting on the loss for too long. There is always another trade around the corner, so take it.
In part two, I'll look at the fear of being wrong and the fear of letting a win turn into a loss.