Overcoming Your Fear of Trading

Every Tuesday Chuck releases a new Trader Tip video on YouTube. This week we will discuss how every trader I work with falls into one of two camps. Those two camps are the overtrade camp, or the afraid to trade camp. Why is this important to you? Understanding what type of trader you are will help you set up your trading rules and processes to support you to become the best trader you are capable of being. One thing I want you to understand is that at the root of both overtrading and fear of trading is a focus on results. So today we're diving deeper into overcoming the fear of trading.

You can read the episode transcript below or watch the video that follows.
If you have any questions, please reach out to us. We look forward to being a continued part of your trading education!

Every trader I work with falls into one of two camps. Those two camps are the overtrade camp, or the afraid to trade camp. Why is this important to you? Understanding what type of trader you are will help you set up your trading rules and processes to support you to become the best trader you are capable of being. One thing I want you to understand is that, at the root of both overtrading and fear of trading is a focus on results.

Let’s talk briefly about results thinking versus process thinking.

Everyone comes to trading with the hope of making money. Behind that hope, sits many different beliefs and objectives. Some beliefs are conscious, and many beliefs are non-conscious. Hope causes the trader to focus on making money. Focusing on making money is the aspect that dooms the trader to failure. Why is that? Success in trading isn’t based on making money. Success is based on identifying a method with a statistical edge that fits you, and then applying process to consistent application of the method. Here’s the thing I want you to understand. The reality is that trading, no matter what method you use, they’re streaky, there’ll be hot streaks where every trade works. Cold streaks are nothing worse. So many traders try and come up with a method that will not have losing streaks. This doesn’t happen.

I can share a story with you. I went out and worked personally with a trader who was in Stock Market Wizards. I went out and spent a week with him on his farm in Ohio and watched him trade and talk to him about trading, and his whole belief set was around high win rates. And he would have really super long winning streaks. His win rate, it was common that would be in the 90%. I remember one specific period, he has a newsletter advisory service. And I’ve been a subscriber to the advisory service off and on. And there was one period where as a subscriber to advisory service, he went six months, six months without a losing trade. You might think well, that’s amazing, and that’s what Inever want to have a losing trade. But here’s the thing. If when he finally had a loser, he had a loser and then what he would do oftentimes is he would double down and then he would try and get out on the first profitable close so that he could say the trade was a win. So in a period about two weeks, you had three trades in which he bought, the market went against them, he bought again, and then eventually he took a big loss. They bought and trade number two bought again. When it gets someone took a big loss. Trade number three he bought, bought again, they went against somebody took another loss. So he didn’t really he did not have a losing trade for six months. But in two weeks, he had three losing trades that wiped out about half of the returns for the year.

I just want you to understand that streaks are part of the game, and streaks have big impact on our psychology, when we’re focused just on the money. Traders focus on making money they cannot control the outcome of events. You cannot control whether the trade makes money or not.

Here’s the key thing I want you to understand as a result, every time a trader loses money increases their level of fear, maybe just a little bit. As they keep losing more and more money, their level of fear rises. At a point the fear becomes debilitating. Now we’re gonna talk about trader who is afraid to trade trader who’s fearful of trade.

The fearful trader is focused on the money that they will lose on each trade, and they cannot bear losing that money. So every time they go to make a trade, let’s say they’re betting $1,000, they bet $1,000, and right away, they’re like “I’m gonna lose this $1,000 I know I’m gonna lose this $1,000.” So what’s ironic is they love the idea of making money trading, but at the time of execution, all they can do is focus on their potential loss.

This fear manifests itself through a number of ways:

Fear of a loss of status like “you’re a terrible trader, you suck.”
Fear of a loss of their dream, “I was going to quit my job and go become a full time trader, now I can’t, what am I going to do?”
Fear of failure, just losing overall
Fear of losing money
Fear of taking the trade
Fear of missing the trade
Fear of letting the trade play out
Fear of losing your profits

All these things are fears that build on each other, and pretty soon, you’re just frozen, can’t do anything. Any performance based activity, where results are outside the person’s personal control, causes fear. So if you just focus on making money, which you cannot control, in any given trade. Over the long run, you can but on this trade you have no control over the market. The market is going to do what it’s going to do. When you focus on it, that causes fear, and that fear becomes the debilitating.

Let’s talk about some characteristics of fearful traders.

Fearful traders tend to be pessimistic either in the market, like they’re pessimistic about the overall market itself. Or in their own abilities. “I’m not very good at this, I don’t know enough, I should go take another course I should go do more research.” Fearful Traders see trades going bad quickly, and are scared that they’re just going to lose more money. So traders in this camp often always need one more rule, one more class to feel confident enough to make a trade.

The fearful traders are the ones that tend to be the big system hoppers, because they keep trying to figure out how can I find something that won’t lose, not realizing that they are the ones that’s losing. Fearful traders have a desire to avoid being wrong and search for the Holy Grail to ensure that their losses will never happen. Fearful traders see a trade setup by the rules, and when it signals they freeze. They don’t pull the trigger.

Fearful traders often see trades take off in their favor, without them being on the trade, which causes enormous frustration. So much so that in some cases, a fearful trader misses trade, sees it take off without him, and then he gets so upset that he missed a trade that the next trade it comes along and they jump. They cancel all their fear, and he just go for it. Of course that trade oftentimes quickly gets stopped out and then they are beside themselves. Why would I ever even do this?

People who are fearful trading, they tend to sit on the sidelines, they do not take action. This is one of the quotes I talk about with my students. “Failure is inevitable in trading. Your ability to succeed will ultimately be determined by your ability to be comfortable with failure. The great news is that YOU get to choose how you will fail! Will you fail in the heat of battle? Or will you fail on the sideline? The path to failure on the sideline leaves the doubt of what could have been.” So atleast when you go out and you trade over traders are like yeah they can over trade and it could cause a lot of problems, but at least they take action.

The fearful traders won’t trade. They can tell themselves a story about “well I actually know about the markets, and if I just learn a little more I do a little bit of this, I’ll be a great trader,” but they don’t take action. Because they don’t take action, they never get to learn from their trades. The thing that they don’t think about is they think they’re protecting themselves by not trading, but they’re actually assuring their failure. Because remember, we don’t just lose when losing money. We also lose when we waste time and time is most often more valuable than money. If you’re not going to trade go do something else. Don’t sit in front of screen and go through this. Get in the game and know you’re gonna make it or not. Hopefully, yes, or don’t do it.

Here’s some strategies to embolden fearful traders:

Develop rules that support you to act when you see your trading signals,. Get really clear about what a signal looks like, have your rules in place then document them into a trading plan. So you can review them over and over again, and you want to create a trade checklist that outlines all the rules that need to be met to take a trade. You’ll fill out the checklist in your pre trade routine. Once you fill out the checklist and see it has met the rules, then you focus on taking the trade.

We define success as following our rules. It’s not how much money we make, it’s do we follow our rules. Do we have a plan, do we have rules, and do we follow that plan and those rules? If you fill out a trade checklist, all the criteria are met, you must take the trade. Must take the trade, or you broke your rules. See most people think of breaking their rules as if I’m supposed to get out on a stop at this price, and I don’t, or I’m supposed to heal the position at this level, and you don’t. Yeah, those are not following the rules, but what a lot of traders don’t think about is not doing something is also a form of not following the rules. If you do everything to prepare for a trade meets the criteria and you don’t do it, you broke your rules.

The other thing you want to do is you want to back test your trading system, and this doesn’t have to be some elaborate back test, it can be super simple. Just taking a chart, picking up a random chart, random timeframe going back in time to a period I’m not even paying attention to and then walk through, walk forward and look for trade setups. Check them off, they should meet all the rules and then record the results. You can do all this by hand, you can do all this in Excel. You don’t have to have a PhD in mathematics or programming, you just do a very simple. Once you do this, you’ll derive an expectancy from the system. Whatever your expectancy is from the back test, reduce it by 20% to create your predicted expectancy, so we don’t want to just accept the expectancy we want to water it down, we want to cut it. Then determine your typical position size allocation.

In our example, we have a strategy we run called a BB gun, it has an expectancy of 50 cents. We reduce the expectancy by 20%. So 50 cents becomes 40 cents. Okay, let’s say we have account size of $100,000 in a standard position size of $1,000. What this expectancy is telling us is that for every $1,000 we risk, we expect to make $400 per trade. Maybe some trades will win some trades or lose but they’re going to average out to $400.

Then we want to reframe our view of every trade. As I said, people who are fearful trading will focus on how much they’re going to lose up front. Instead of focusing on losing $1,000, if you take the trade, you reframe it. You focus on the fact that you’re losing $400 every time you don’t take a trade that meets your rules. You’re losing money by not taking action. That’s the reframe. How are you ever going to realize your expectancy if you don’t trade. You realize your 40 cent expectancy by trading.

Next thing we want to do is we want to record every trade in our trading log. Every trade you take as recorded in your trading log, win or lose, has enormous value, because it is a trade that you could use to analyze your performance. We need to reward ourselves for taking trades because they give us a chance to learn. It’s very difficult to learn from the trades we don’t take. Just remember when you take a trade all your psychology, all of your emotions come out. When you don’t take a trade you just watch the screen. You can be very passively. “Oh yeah, I could go on there. Yeah, right. That’s trade to there then I can get out there. That was easy.” Put your real psychology in the trade. That’s what happens when we take real trades get off the sidelines.

One thing I want you to understand is that few traders actually record their trades. Few traders have trading plans, or checklists, and record their trades. If you ask me, “How do I know if I’m gonna make it as a trader or not?” One of the key predictors is: do you record your trades and then analyze them? I know few traders who record data at this level, who are not successful. If you do this, your odds of succeeding are way up.

The last thing is we want to reduce the number of rules, the amount of trader discretion, more rules, the more fear. The more rules, the more decisions we have to make the more overwhelmed traders experience because how many decisions they have. This is one of the things that I’ve learned, particularly working in retail traders. I used to teach them everything upfront, be a long road of learning a whole path of how to think, and if you spent a lot of time a lot of effort at the end, you’d start to get an idea how markets work. I have changed the way I teach. Now what I do is I focus on introducing trading systems with easy rules that people can follow. They cannot follow three rules to a system, how are they ever going to do it when it gets more complex? They’re not. So I’ve simplified. If people have success, they come to another level of complexity, have them have success, take them to another level of complexity, and have them have success. This creates these feedback loops that are incredibly powerful for helping them succeed. So just remember, the more rules the more fear. The way to combat it is less rules. Lastly, we just really want to get in our brains that we evaluate success by following our rules. It’s not how much money we made. Following your rules equals success, breaking your rules equals failure, nothing to do with your p&l.

The difference between over traders in fearful traders is in application. Over traders use rules to slow down, to spread out the distance between stimuli and action, and for over traders who want to make sure that they follow all the rules before trading to slow them down. Fearful traders use rules to promote action. Because the rules take priority over fear. You have your rules, you have your checklist, you fill all that out. If it’s all in place, doesn’t matter what you feel you do the trade. Doesn’t matter that you’re scared, you do the trade. This is where fearful traders have to be.

That wraps up today’s Trader Tip Tuesday: Overcoming Your Fear of Trading. I encourage you to review this more than once., and ask yourself if you do suffer from being a fearful trader. Which of these techniques can you implement? And when will you do it? About now! To make sure that you improve the quality of your trades and take action. Stay tuned every Tuesday for additional webinars such as today’s where I will teach you different ways to think about trading that will help you take your performance to an elite level. Thanks for listening. God bless. I’ll see you next Tuesday. Bye.