Overcoming Fear as a Trader

In this video, I’m going to cover one of the most important aspects when learning to trade: overcoming fear.

Fear when trading is something I know well. I’d exit my winning trades too soon for fear it’d turn against me. I’d hesitate when entering a good setup for fear of being wrong and losing money and miss the move entirely. When trading futures, I’d move my stop-loss too soon and get stopped out for break-even before I even gave the trade a chance to play out. If you do any of these things, here are some tips that can help you overcome the fear obstacle that is holding you back from successful trading.

Define Your Edge

In order to overcome fear, you need to understand your edge. Meaning: what setup puts the probability of having a winning trade in your favor? Let’s say you have a break and retest strategy that gives you a favorable risk to reward. You must know what conditions validate a trade entry and what invalidates it and then you must have the discipline to execute based on your rules.

Let’s say you like playing a break and retest strategy on Tesla. What other conditions must be present for you to enter on the retest? Does it need to have relative weakness to the overall market? Does it need to be above or below VWAP? Maybe a moving average? Does it need to be within the first 30 minutes? Whatever your criteria is, write it down and commit it to memory. If you don’t have an edge, you shouldn’t be trading. Chances are you’ll end up like me in my $1,000 day trading challenge: broke.

Backtest Your Strategy

So if you aren’t confident in your strategy, you should backtest it. Go back a month, look for your setup, and see how it’d play out. I’ll pick a random day with Tesla and then mark key levels from the previous day where I’d be interested in looking for a break and retest setup. If conditions for an entry are present, take the trade, with your stop loss and profit target set. Then, let it play out and track your results in a spreadsheet. Maybe you find that your backtesting results show that your strategy isn’t as profitable as you think it is. Maybe you need to adjust your parameters so that you are more selective on your entries. Or maybe you find that your strategy is amazing… you just suck at executing it properly in the moment. Let’s fix that.

Size Down

So if you have a profitable strategy for trading but fail to implement it properly, ask yourself why. If you weren’t confident in your setups before, backtesting should have shown you that you should be. Most likely, you’re worried about losing money.

You are hesitant to enter a trade because what if you’re wrong? What if it stops you out? Well, the solution is simple: size down. If you’re trading stocks, trade 1 share. Options, one contract. Futures, one micro contract.

As a beginner trader, any losses over one day should not wreck your account. If you screw up, make mistakes, etc… maybe you lose $20 or $30. Not $200 or $300. And certainly not thousands.

Once you start to really get the hang of executing your strategy, making money is the easy part. All you have to do is double the amount you’re trading. Maybe add a zero to it. Because if you can’t consistently, profitably trade 1 share, how can you expect to trade 1,000 shares? You simply can’t.

Embrace Risk

No matter how good of a trader you become, you will take losses. It’s inevitable. So the sooner you get comfortable with the idea of losing, the better off you’ll be. When you enter a trade, you should know how much you stand to lose based off of your stop-loss. If a trade works out – great. If not – fine. You saw your setup and executed. You should have an idea based off of your backtesting how often you can expect to win or lose with your strategy, so you know losing is part of the deal. Don’t let it shake you up and don’t let it make you make poor decisions after the trade is over. You don’t have to take my word for it, though. Here’s Mark Douglas in the book Trading in the Zone:

The best traders not only take the risk, they have also learned to accept and embrace that risk.

The best traders can put on a trade without the slightest bit of hesitation or conflict, and just as freely and without hesitation or conflict, admit it isn't working. They can get out of the trade—even with a loss—and doing so doesn't resonate the slightest bit of emotional discomfort.

Since risks are inherent in trading, you must accept it every time you put money on the table.

Journal Your Trades

It is imperative that you understand your strengths and weaknesses as a trader. You need to be able to look back at your past trades with objectivity, identify areas you can improve upon, and note the things that you do well. There are platforms out there that allow you to import your trades, and it can give you statistics based off a variety of parameters. So I can easily see from the data – hey, don’t trade during lunch hour, dummy. Another way to journal that I’ve been doing is creating your own Discord server – just for you – and organize it however it makes sense for the way you trade. Then post annotated charts after each trade, noting why you took the trade, how it played out, etc. I also do a daily recap, which can also include your mental state, mistakes you’re making, what you’ve improved upon, etc.

It’s really helpful and I highly encourage you to go over your trades in some way.

Final Thoughts

Once you conquer your fear as a trader, there isn’t much left to stop you from becoming a consistently profitable trader. Again, let’s go to Mark Douglas:

Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table.

If you haven’t read Trading in the Zone yet, I highly recommend it, in case that wasn’t obvious.

That’s all from me in this one, I’ll see you in the next.