Trader profession can add a bunch of emotions and experiences in your daily life. Fear, along with other critical feelings, drive the financial markets. As long as the fear of losing money affect traders’ ability to make the right decisions in the market, it could be called as one of the most basic emotions in trading. In general, the fear emotion arose as a result of the supposed threat and developed into a natural defence mechanism in most animals. A limbic system, one of the most primitive brain’s parts, is responsible for the fear in our head. The fear is the essential component of the instinct of self-preservation in developed animals and appears in the form of “run or fight”. Human has the same structure.
Several types of emotional response related to fear to arise during trading:
All of the emotions mentioned above and related to fear, reflect in daily price action and markets’ trends. They often lead to losses in trading if traders do not control them properly. Nevertheless, the fear might be useful in case of unexpected events that happen in the market. As one of the most famous past traders, Gunn, noted, - “The fear will save you if you act quickly when you understand that a mistake has been made”.
Many professional traders admit that use fear as a sort of sixth feeling, allowing to exit a position in time if something went wrong. That’s related to situations when stop-loss or take-profit orders weren’t triggered yet, but traders feel that something’s wrong. Another Gunn’s quote reflects that situation: “Market’s fear is the beginning of a path to wisdom”.
Having an effective trading strategy as well as necessary technical and analytical skills is not enough to be successful in the financial markets trading. A correct mental setting is also needed. Traders could reach that level once they can control their emotional reactions in any trading situations possible. The vast majority of people do not have a chance to know how would they react on situations in trading, and what emotions would they experience. They do not even have a notion of how strong the emotional impact would affect their trading result and profitability.
Another emotional reaction, which harms traders, includes fear obstructing deals opening and making trading decisions. That might hurt if a trader did not close a losing trading position in time, finding himself paralysed and unable to close the underwater deal, while the market keeps moving against him. That type of reaction might also prevent traders from pulling the trigger, which makes him going against the trading decision and system rules.
One more kind of fear appearing in the trading process usually happens when a trader closed a losing deal. A trader might be too frightened to enter the market again due to losing the confidence in his trading strategy, caused by the previous negative result, even though there is a brilliant opportunity to recover all of the earlier losses.
When it comes to fear in trading, traders should keep in mind that fear relates to future events. That might take a form of prolonging unfavourable situation (holding losing positions), which could make the current situation even worse. An excellent way of constructive work with fear is that it can replace a hope, which might hurt even further. For example, instead of hoping that the market will reverse and go in the right direction, traders might be afraid to lose even more money on that particular position. Cautiousness would not hurt your trading. That change technique might help traders who struggle to make tough decisions of cutting current losses.
In general, if you can be disciplined and trader wisely, using a profitable trading strategy, executing all of the algorithm's rules thoroughly, you can easily control fear and other emotions. As long as you plan your deals and stick to the initial plan, fear’s impact might be lowered to the minimum.
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