The Differences Between Pain and Fear in Trading

The Differences Between Pain and Fear in Trading

In trading most new traders underestimate the mental and emotional learning curve of pain and fear that could end up creating their poor trading results.

They have a quick winning trade but they fear that the profit will disappear so they sell for a small gain and miss the big trend in their favor. When a trade goes agains them they don’t want to feel the pain of taking their stop loss and locking in their losing trade so they open theirself up to the larger pain of staying on the wrong side of a trend. Then they end up with the pain of small wins and the big losses that is the formula for unprofitable trading. A formula for ruin.

Instead the profitable trader is fearful of losses getting bigger so they sell quickly when losing, risking a maximum of 1% of their capital on any one trade based on the metrics of their position size and stop loss placement. Good traders are able to think clearly and trade rationally knowing exactly what they are risking, when their stop is hit, they get out. This enables them to keep all their losses small.

The number one priority of any serious trader has to first be to avoid the risk of ruin after a string of losing trades. Profitable traders avoid much of the pain of drawdowns through proper position sizing and respecting stop losses. 

Trading is not all fun and games. Traders do not make money on every trade, most don’t even make money on half their trades. It is not like other careers, jobs, or hobbies where you work and then get paid automatically for your time regardless of performance. A trader’s pursuit is more like the life of an entrepreneur. Our trade entry or idea may work or it may not. The equity, option, or futures contract we just bought may go up in value or it may fall lower. After many years of hard work we may have enough capital to pay off our house or lose $50,000 of our hard earned money. We may become a millionaire in a runaway bull market or waste five years of hard work with nothing to show for it. A trader’s path is dependent on the market’s price action that we have no control over. We control the amount of pain we experience in our trading through our position sizing and discipline for following our quantified trading system.

Here are the five primary fears of trading:

  1. FOMO: Fear of missing out on a profitable trade. FOMO makes abandon their trading plans and instead chase an entry late in a trend. This impulse usually happens too late and ends up being a losing trade.  
  2. The fear of losing money. The fear of loss will cause a trader to freeze up and not take a valid entry at the right time. You have to accept the potential of any trade being a loss that is why it is important to keep your losses small to replace fear with acceptance. 
  3. The fear of taking your stop loss and the trade bouncing back and eventually being a winner. The risk of a reversal after a stop loss is the cost of insurance against a big loss. 
  4. The fear of being wrong. When you don’t want to admit your trade did not work out. This is ego based when wanting to be right about one trade is more important than wanting to make money over the long term.  
  5. The fear of letting a winning trade turn into a losing trade. Locking in winning trades too soon is usually based on the fear of seeing the open paper profits disappear. You have to accept risking open profits for the potential of capturing bigger wins. 

Here are 10 painful aspects of trading and what to do about them:

  1. The pain of losing money. The pain of any losing trade is correlated to your position size. Trade smaller so it is much less painful, and just one outcome of the next 100.
  2. The pain of being wrong about a trade you were sure about. You lost simply because the market wasn’t conducive to your particular trade, trend followers lose money in choppy markets, swing traders lose money in trending markets, the market picks the particular winning trade not you.
  3. The pain of a drawdown in capital. Even the world’s best money managers do not continually hit all time equity highs. Your path may look like this $10,000 to $20,000 to $15,000 to $25,000 to $20,000 to $30,000 and then the climb into six figures and beyond. Understand this reality to lessen the impact. 
  4. Consecutive trading losses hurt. They make you doubt yourself, your method, and your system. You need to remember your winning trades, your winning years, or your proof of back-testing, or paper trading of your method’s profitability to help you keep the faith when your equity curve is going in the wrong direction. 
  5. The embarrassment of public losses. You told everyone who would listen about a great trade entry, and you were wrong. Never be overconfident in any trade, but always be sure of your stop loss. Always be uncertain in your trade winning or losing, just follow your system.
  6. The pain of admitting you were wrong. Cut your loss and move on to the next trade, trade reality not your ego.
  7. Losing paper profits, you are up $1,000 on a trade then a massive whipsaw takes back those profits in one move. Take your trailing stop and move on to the next trade, there is truly no reason to cry over spilt milk.
  8. You are following a guru and come to realize he can’t predict the future or make you easy money, you are going to have to build your own system and write your own plan. You stop following gurus and look to learn how to trade all by yourself. All trading education should be teaching by example and learning to build a trading system that fits your individual risk tolerance and return goals. 
  9. You take a position that meets all your entry guidelines and then it hits your stop loss. Follow your plan, exit the trade, and say “next”.
  10. You start trading a system that did amazing in back-testing and promptly lose 10% of your account in a drawdown. You have to double check to see if you made any mistakes in your research, if the method is valid then stick with it so it can win in the long term, you may need to make slight adjustments in position sizing or stops to account for volatility that you may have missed.

You can’t stop feeling fear and pain completely as a trader but you can manage how you react when these emotions are being experienced by being mindful of them and following your trading plan.