How can I overcome the fear of losing in my trading?

We’re trading for one specific purpose, mostly to make money. But the flip side of that, if we get it wrong is that we lose money. And when we’re placing a trade, the fear comes up in three places.

The first time that fear comes up is when you’re about to hit the buy button to enter your trade and the fear at that point comes from not being certain about your rules. The fear also comes from thinking about this particular trade and how this one trade will go. So the first point of fear is when we’re entering the trade.

The second point of fear is during the trade, depending on what’s happening, the movement in share price of our stock raises some emotion in us. Let’s say our trade goes into profit, we start to be fearful often that we’re going to lose that profit and we want to grab it and take that profit off the table. Or if the trade moves against us, we start to be fearful that we’re going to have to bank a loss and face the fact that we made a bad trading decision. The fear of losing our profits or facing a loss comes in when we’re in the trade.

The third point of fear is when we exit the trade. When you get your exit signal, the next point of the next driver of the fear is when you ask yourself the question, “Am I making the right decision by closing this trade?” or “I’m fearful of missing out on profit by holding onto the trade”, or “I’m fearful that my signal is not going to be accurate. It’s not going to give me the maximum profit. Maybe I should hold on and hope that it’s going to go up.”

There’s three points of fear that come up for traders generally when you’re placing a trade and all of them come down to one thing, they all come down to focusing on this particular trade and this trade outcome. What happens is we’re placing a trade and we put a bit of ourselves, our judgment, and our ego into that trade. If that trade is profitable, then we pat ourselves on the back and say, “Yeah, I’m good trader. I made a good decision.” Right? But if the trade is a loser, we go, “Oh God, I made another bad decision, lost money again.”  Because it’s the focus on the current trade and the outcome, whether that trade makes money that most often causes the fear. When you step back from focusing on making or losing money, you can start to focus instead on the process of trading and how well you are following your trading system.

As traders, we place trades, but the process of trading which includes: Running our rules, running our scans, placing many trades, managing the portfolio, putting trades on and taking them off as they trigger our entry and exit rules, allocating capital between systems or between rules, and managing our exposure are the processes that is actually the most important thing to focus on. Because when you focus on the process and you think about the next 100 trades, or the next 1000 trades that you’re going to take, the fear of loss in each individual trade goes away. That’s because each individual trade is pretty much meaningless in the context of the next 100 or the next 1000 trades.

If you’re fearful of this specific trade and you just can’t get past that, the reason is usually that you have too much exposure on that trade and that trade is giving you too much risk, or you don’t have faith in your process (in your trading system) so when you have a fear of losing, you step back from the trades that you’re making, look at your process and think about the next 100 or the next 1000 trades.

When you think about that, if you’re confident in that process over the next 1000 trades, then the fear will generally dissipate. But if you look at that process trades and you lack confidence, it’s probably because you don’t have a good system or you have not backtested your trading system thoroughly enough.

You need to separate yourself from the individual trade outcomes and that will go a long way towards eliminating the fear of placing trades, and then also taking trades off. I’ve taken thousands and thousands of trades over the last couple of decades and each one individually is pretty much meaningless. If I make a loss, that loss is pretty much meaningless since it’s so small it doesn’t really matter in the context of the portfolio. Making a winning trade also shouldn’t be the be-all and end-all. No single trade will make will make you rich either. If you have one trade that has the potential to make you rich, it is most likely also big enough to destroy your account if it goes against you… which means you will not survive very long as a trader.

So we’ve got to stop thinking about those individual trades and adopt a good stock trading system that you have thoroughly backtested, and trade it at a level of risk and exposure that allows you to sleep soundly at night. Then you will find that the fear of pulling the trigger will go away.

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