Trading Fears, We All Have Them.
It's How We Handle Them That Counts.
All market timers, traders and investors, in every kind
of market, feel fear at some level. Turn on the news one
day and hear that a steep unexpected sell-off is taking
place, and most of us will get a queasy feeling in our
stomachs.
But the key to successful "profitable" market timing,
in fact all trading, is in how we prepare ourselves to
handle trading fears. How we prepare to deal with the risks
inherent in trading.
Mark Douglas, an expert in trading psychology, says this
about trading fears in his book "Trading in the Zone."
"Most investors believe they know what is going to
happen next. This causes traders to put too much weight
on the outcome of the current trade, while not assessing
their performance as "a probability game" that they are
playing over time. This manifests itself in investors
getting in too high and too low and causing them to react
emotionally, with excessive fear or greed after a series
of losses or wins."
As the importance of an individual trade increases in
the trader's mind, the fear level tends to increase as
well. A trader becomes more hesitant and cautious, seeking
to avoid a mistake. The risk of choking under pressure
increases as the trader feels the pressure build.
"All traders have fear, but winning market timers manage
their fear while losing timers (as well as all traders)
are controlled by it." |
All traders have fear, but winning market timers manage
their fear while losing timers (as well as all traders)
are controlled by it. When faced with a potentially dangerous
situation, the instinctive tendency is to revert to the "fight
or flight" response. We can either prepare to do battle
against the perceived threat, or we can flee from this
danger.
When an investor interprets a state of arousal negatively
as fear or stress, performance is likely to be impaired.
A trader will tend to "freeze."
There are four major trading fears. We will discuss them
here, as well as how to handle them.
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Fear Of Losing
The fear of losing when making a trade often has
several consequences. Fear of loss tends to make
a timer hesitant to execute his or her timing strategy.
This can often lead to an inability to pull the
trigger on new entries as well as on new exits.
As a market timer, you know that you need to be
decisive in taking action when your strategy dictates
a new entry or exit, so when fear of loss holds
you back from taking action, you also lose confidence
in your ability to execute your timing strategy.
This causes a lack of trust in the strategy or,
more importantly, in your own ability to execute
future signals.
For example, if you doubt you will actually be
able to exit your position when your strategy tells
you to get the out, then as a self-preservation
mechanism you will also choose not to get into
a new trade. Thus begins analysis paralysis, where
you are merely looking at new trades but not getting
the proper reinforcement to pull the trigger. In
fact, the reinforcement is negative and actually
pulls you away from making a move.
Looking deeper at why a timer cannot pull the
trigger, a lack of confidence causes the timer
to believe that by not trading, he is moving away
from potential pain as opposed to moving toward
future gain.
No one likes losses, but the reality is
that even the best professionals will lose. The
key is that they will lose much less, which allows
them to remain in the game both financially and
psychologically. The longer you can remain in the
trading game with a sound timing strategy, the
more likely you will start to experience a better
run of trades that will take you out of any temporary
trading slumps.
When you're having trouble pulling the trigger,
realize that you are worrying too much about results
and are not focused on your execution process.
By following a strategy that unemotionally tells
you when to enter and exit the market, you can
avoid the pitfalls caused by fear.
This, of course, is what we do here at Fibtimer.
We learned long ago that unemotional (non-discretionary)
timing strategies save us during emotional times
in the market. We know the strategies work, so
we put aside our fears, and make the trades.
"...good
timing strategies are designed to guard
against big losses" |
And remember, you must be able to take a loss.
Consider them as part of trading. If you cannot,
you will not be around for the big gains because
you will be on the sidelines guarding your capital
against that potential loss.
Remember that good timing strategies are designed to guard against big losses.
Every trade you take has the potential to become a loss, so get used to this
reality and take every buy and sell signal. That way, when the next big trend
starts, you will be onboard and profit from it.
Fear Of Missing Out
Every trend always has its doubters. As the trend
progresses, skeptics will slowly become converts
due to the fear of missing out on profits or the
pain of losses in betting against that trend.
The fear of missing out can also be characterized
as greed of a sorts, for an investor is not acting
based on some desire to own the stock or mutual
fund - other than the fact that it is going up
without him on board.
This fear is often fueled during runaway booms
like the technology and internet bubble of the
late-1990s, as investors heard their friends talking
about newfound riches. The fear of missing out
came into play for those who wanted to experience
the same type of euphoria.
When you think about it, this is a very dangerous
situation, as at this stage investors tend essentially
to say, "Get me in at any price - I must participate
in this hot trend!
Could we be in just such a situation now?
The effect of the fear of missing out is a blindness
to any potential downside risk, as it seems clear
to the investor that there can only be gains ahead
from such a "promising" and "obviously beneficial" trend.
But there's nothing obvious about it.
Remember the stories of the Internet and how it
would revolutionize the way business was done.
While the Internet has indeed had a significant
impact on our lives, the hype and frenzy for these
stocks in the 90's ramped up supply of every possible
technology stock that could be brought public and
created a situation where the incredibly high expectations
could not possibly be met in reality.
It is expectation gaps like this that often create
serious risks for those who have piled into a trend
late, well after it has been widely broadcast in
the media to all investors.
Next week read part 2, the conclusion of this
article on "Trading Fears."
Recent articles from the FibTimer market timing services;
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FibTimer reports may not be redistributed without
permission.
Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable. |