In trading, there are so many uncertainties and so many “head-fakes” and false moves that true success may arise only from confidently holding your carefully analyzed (or even intuitive ‘gut’) position in the face not only of uncertainty, but of adverse (temporary) price movement in the short term.
Courage over fear (or in spite of fear), as well as confidence over indecision are absolutely essential in market speculation.
Strength of your convictions play a crucial role not only in deciding “when to enter”, but “when to exit.” As you may have read many times, humans are conditioned to take quick profits in the market (which soothes our ego) and hold on to losing positions (in an effort to prevent the pain of being wrong). While many traders who have been in the game for any time know this fact, and experience it personally, it takes a strong individual to overcome this natural human tendency. Doing so does not come easily, and it requires specific strategies to overcome them.
After a few burning losses in the market, fear becomes the natural way of thinking and operating for traders and investors. It becomes difficult to overcome these painful financial and emotional losses and the natural coping mechanisms involve aversion, avoidance, doubt, hesitation, and other negative ways of coping. Again, it takes education, behavioral and cognitive (thinking) changes, and sometimes even takes counseling with others. Although everyone is different, and will be susceptible to fear in different ways (as well as access to personal confidence), treatment strategies to overcome fear and instill confidence will be slightly different for everyone.
Please read Dr. Steenbarger’s recent post and follow his links. Attached are a few key quotes I found particularly helpful:
“The successful trader, like the chess grandmaster, sees things and thinks about things differently from the novice. The thought process is more dynamic and flexible; perception is more organized, thanks to rich mental maps.”
“Training transforms traders. It alters behavior patterns, it reorganizes perception, and it shifts thought processes.”
I wanted to highlight the next quote and concept, which is often brushed aside by the larger trading education community:
“Perhaps the greatest change that sustained experience brings is resilience. The successful trader has a high degree of conviction in his or her ideas, simply because of the accumulated base of experience that show how those ideas work out. That conviction enables the expert trader to press an advantage when it’s present and hold onto a good position even during a drawdown.”
He then describes one of the hidden realities of the trading community from experiences he has with top professional traders: Most of the annual profits from a trader comes from a small handful of trades (which may be 5% to 10% of all trades taken). A few of points arise from this:
- Fear keeps you out of the market when you should be in (and fear arises from losing money)
- A trader must press through this fear and put on larger than normal positions when conditions line up in abnormally high probability environments
- If traders MISS key opportunities to hold trades longer with conviction, and fail to enter positions with sufficient size, traders will struggle to break-even at best
- Conviction and courage arise from personal validation of your method and strategy and is essential to be a successful trader
Overcoming fear is NOT enough to be a successful trader. To be successful, one must:
- gain confidence and courage to be able to take on more risk when market conditions warrant it,
- conserve trading actions when conditions warrant it (guard against overtrading),
- commit to your executing your strategy consistently with confidence and courage, especially in the face of adversity.
Be brave, think against the crowd, and spend the time learning, researching, and developing a trading strategy that works for you, then develop the confidence to follow it and realize that trading success is a factor of creating a positive statistical edge that is experienced over many trades.