No matter who you are or what you do for a living, we are all victims to our own fears. This is especially true for traders and investors, because trading is a mental game more than anything else. So how do you establish a trading mentality that will let you overcome fear, even when it seems like the cards are stacked against you?
The first step in creating a strong trading mentality is to acknowledge that you are actually scared of the unknown. Trading is a difficult task because the markets could be riding a strong bull trend, but you are still trading against numerous uncertainties.
If you let fear guide you, it will be more difficult to manage your trades and portfolio. Fear of loss is real, and I have seen it ruin many traders.
What is fear of loss?
In his book, “Trading in the Zone,” the late Mark Douglas writes that the fear of losing money is one of the four main fears traders and investors have. When your trading mentality is full of fear, you’ll find yourself making irrational decisions, such as holding onto a losing stock for too long.
When these decisions cause you to lose capital, your trading mentality is reduced due to poor decision-making, negligence or simply taking risks, in an attempt to recover your losses.
It is not easy to overcome fear of loss in trading.
When you lose money, it is common to start worrying that you will never have a chance at redemption. Thoughts spiral, and eventually you are consumed with worry about losing out on future trades and losing even more money.
We’ve all been there before. Even the most seasoned investor can be scared out of his socks if the uncertainties stack up too high.
Think back to 2022. Stock markets were down sharply and few other asset classes performed well. Many people lost money in their savings accounts, investments, 401Ks, and trading accounts. And there was nothing we could do about it.
There were plenty of certainties heading into 2023, none of them good: continued high inflation and a very aggressive and restrictive monetary policy put in place by the Fed. People wondered if stocks could actually rise in that challenging environment.
Even the most experienced investors wondered how to make up for losses from 2022. It was a very unsettling time, and we had to learn to live with it.
If you had a strong trading mentality and were able to stay the course, you saw your portfolio skyrocket in 2024, which brought a new set of trading challenges with it.
How to create a strong trading mentality when faced with uncertainties
So here’s my advice when we’re faced with numerous uncertainties:
- Recognize that market and economic conditions are different
- Identify the uncertainties you’re facing
- Adjust to the changing environment
- Embrace the fact that every day brings something new – good, bad or neutral
- Remember that this too shall pass
I also find knowledge to be the best way to shore up your trading mentality, so make sure you’re subscribed to receive my Market Blasts for updates on the marketing throughout the week.
