Trading Success Overcoming Fear In Trading By Lyle Wright lylewright@gmail.com 1
A Little Background First... Name Is Lyle Wright (aka The IT Guy ) Education Mathematics, Computer Science, Psychology Primary Career Designer/Printer, Business/Technical Consultant Sports Career Athlete, Lifeguard, Teacher, Coach/Mentor, OfKicial Trading Career Stocks/Options (~15 Years), BAMM (~10 Years) 3
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Tharp Trader Test (My Results) 35 A or B Questions Takes 4 Minutes Custom 7 Page Report 1 Of 15 Trader Types You are an... Administrative Trader TRAdINg STRENgTHS You should have no problem staying with and executing a simple trading system that someone gives you and you feel confident about. With a set of rules in hand, you should have no problem weighing alternatives and taking rapid decisive action. You could easily treat trading as a business provided your life is in order and you have no major distractions. However, if you have a lot of stress, this strength could turn into a challenge and cause you problems. Stress could overtake your life. TRAdINg CHALLENgES You love the details of trading system analysis and development, but your efforts can be misguided if you are following the wrong guidelines or advice. Under stress, you may question your commitment to trading as a profession because it doesn t feel fulfilling or personally satisfying. Strengths/Challenges Your Administrative Trader Report You can tend to be overly critical and only notice the negatives in your trading. If you do not learn how to recognize your mistakes, you could become stuck. 102A Commonwealth Ct. Cary, NC USA T 919.466.0043 F 919.466.0408 www.vantharp.com 5
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We may not be able to control the events that happen in the world, but we do get to decide how we respond to it! 9
The only difference between fear and faith is that fear is imagination undirected and faith is imagination that we consciously direct to create what we want in life. 10
Face the fear, embrace the uncertainty, and start living in a beautiful state. 11
It isn t like we are being chased by animals that are trying to kill us! 12
Most fear is just bad management of our own mental faculties. 13
What is fear? 14
Sometimes once you understand things more, they aren t so terrifying. 15
The Jirst thing we fear as pain in our lives is what I call loss pain. 16
The second thing we fear so much is process pain. 17
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The second thing we fear so much is process pain. 19
The third thing most people fear is outcome pain. 20
When you re obsessing about loss pain, process pain and outcome pain, the more you focus on those, the more you obsess about those types of pain, and your brain and body go no, don t do that, I don t want to experience that. 21
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Current State Of Your Trading? Are you feeling stuck and not sure where to go next? Are you getting better and improving, or getting worse? Do you feel like the stock market is beating you up? Insanity = Doing the same thing over and over again, and expecting a different result. 23
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Conquer The Four Fears: Loss, Missing Out, Letting ProJit Turn Into Loss, Not Being Right 25
Fear is dejined as an unpleasant, often strong emotion caused by anticipation or awareness of danger, going on to explain that fear implies anxiety and usually the loss of courage. 26
All traders have fear, but winning traders manage their fear, while losers are controlled by it. 27
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In contrast, when a trader feels the surge of adrenaline but interprets this as excitement or a state of greater alertness before placing a trade, then performance will tend to improve. 29
1. Fear Of Loss 30
No one likes losses, but the reality is, of course, 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 Jinancially and psychologically. 31
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You should be more concerned about avoiding big losses and less concerned about taking small losses. 33
Never get stuck in the mindset of hoping a loser will come back to breakeven, as that is one of the trader s most deadly mental fantasies. 34
Fear manifests itself in at least two main ways: fear of losing money and fear of losing projits. 35
Fear Of Losing Money 36
To overcome fear of losing, remind yourself that a surgeon spends a lot of money to receive their qualijications. Treat losing in the market as a form of tuition fees, a necessary investment. 37
Fear of Losing ProJits 38
To quote Jesse Livermore (one of the greatest traders of all times): Most people fear when they should hope and hope when they should fear. 39
This is called expectancy. 40 It is not about whether you win or lose, it is about how much you win when you are right, and how much you lose when you are wrong that matters.
Three Main Methods To Overcome Fear Of Losing Changing one s perception of losing. To overcome the fear of losing money, treat any money lost as tuition fees. In addition, do not treat unrealized profit as your money; those are merely profits on paper. One can t be afraid of losing money that does not belong to them yet. 41
Three Main Methods To Overcome Fear Of Losing Have clearly defined rules for cutting losses and taking profits. These should be based on empirical research or intensive back testing. 42
Three Main Methods To Overcome Fear Of Losing Use visualization techniques to take one s focus away from the possibility of losing. Visualize the current position becoming a big winner, a grand slam. This does not mean one should pray and hope and visualize a losing position turning into a grand slam. A good trader should always ensure that they know exactly when to cut their losses. As long as the protective stop loss is not reached, one should not let the fear of losing overwhelm you resulting in the closing of a position prematurely. 43
It Helps To Ask Yourself Two Questions: What is the worst that can happen? The worst is that your stop loss is hit and you lose your pre-determined amount of capital on your position. What is the best that can happen? The best is that your profit targets are hit and you win your pre-determined amount of capital on your position. 44
2. Fear Of Missing Out 45
3. Fear Of Letting A ProJit Turn Into A Loss 46
4. Fear Of Not Being Right 47
The desire to focus on being right instead of making money is a function of the individual s ego, and to be successful you must trade without ego at all costs. 48
If you have a perfectionist mentality when trading, you are really setting yourself up for failure, because it is a given that you will experience losses along the way in trading. 49
For the trader who is dealing with excessive ego challenges, this is one of the strongest arguments for mechanical systems, as you grade yourself not on whether your trade analysis was right or wrong. Instead you judge yourself based on how effectively you executed your system s entry and exit signals. 50
Be sure you are writing down your reasons for entering each trade, as the ego will play tricks and come up with new reasons to hang on to losing positions once the original reasons have evaporated. 51
As a trader, you must move from a fearful mindset to a state of mental conjidence. 52
Too many investors have an all-or-none mentality. They're either going to get rich quick or blow out trying. You want to take the opposite mentality one that signals that you are in this for the longer haul. 53
While the market is certain to experience major declines, it s impossible to predict when they ll occur. At the same time, Buffett urges investors to look at these as opportunities as he s said in the past be fearful when others are greedy. 54
During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. 55
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Questions? Comments? Personal Examples? 60