Dealing with Fear

[John Starks]

There are two kinds of fear in this world: legitimate fear and illegitimate fear. Legitimate fear is the kind of fear that is based on the fact that there is real danger. Illegitimate fear is based on perceived danger when none actually exists. Illegitimate fear can also co-exist with legitimate fear.

 

Fear in trading is both legitimate and illegitimate. Illegitimate fear is any fear that is not based on fact. It is fear based on a misunderstanding of the facts, over- exaggeration of the facts, or misperception of what the facts are or are not. The most common source for illegitimate fear is lack of knowledge. Take, for example, my incident with ghost stories. A bunch of us college-age guys sat in a room over a morgue, in the dark, telling ghost and horror stories that we had read. We scared each other so badly that none of us could move until daylight. We were literally frozen in our tracks — I mean complete physical paralysis. It was one of the longest nights of my life. Deep down inside, I knew what we had done, but I allowed my emotions to override any rational thought — actually, any thought whatsoever.

 

It is amazing how similar fear in trading really can be. For example, have you ever been involved in a trade risking a few hundred dollars where, as soon as it started to go against you, your heart rate increased and your palms became sweaty? Why is that? It is only a few hundred bucks! If you aren't willing to risk a few hundred bucks, why are you trading? It isn't about the few hundred bucks, it is about over-exaggerating the situation. The emotions are given more attention than they deserve.

 

Conversely, there is a very real fear concerning the overall ultimate outcome of any trading venture. The statistics back this up. It is a battle to balance the fear involved with trading against the expectation of making profits. On a single trade, the fear should not exist. But the fear from the probability of long-term success is lingering in the background, and causes many traders to try to change those probabilities one trade at a time. In the process of trying to avoid failure, they bring it on faster.

 

The first step to overcoming fear is to determine which kind it is. Kids are fearful of many things until they learn to understand that the fear is unfounded. Knowledge is the best weapon to fight the negative affects of fear in your trading. The more you know, the more you understand, the less fear will have a negative affect on your trading.

 

The knowledge you need can be acquired by experience, mentoring, or both. Experience can be a hard teacher. Many traders and investors (in fact, most) lose money and are defeated long before they can acquire the necessary experience. If you are to become successful in the markets, it may be a lot easier to invest in yourself through proper mentoring than to quickly lose more money than it would ever cost to learn the tricks of the trade from an experienced trader.