How to overcome fear when trading

Anxiety and fear can paralyze you both physically and emotionally. But it can be turned into a good thing. Edward Watkins, Professor in Experimental and Applied Clinical Psychology at the University of Exeter, describes:

  • “First, by worrying about something, we are more likely to think of reasons to take action and be motivated to do something. 
  • Second, worry acts as a reminder to do things – a mental process to make sure we try and tackle it… 
  • Third, worry can involve effective preparation, planning and problem-solving.”

Some famous examples of when traders reacted to emotion and fear were panic selling during the Wall Street crash of 1929 (12.9 million shares sold) and Dubai’s housing crash in 2009 (Dubai World shares worth billions). Also, you may have heard about the panic buying of toilet paper, but you may not know that it happened multiple times in history – 1973, 2013, and 2020. 

Let’s first see what general thought patterns can create a debilitating negative spiral. Then, you’ll learn how to overcome four specific fears that so many traders suffer from.

Why you fear trading

Experts at Anxiety Canada compiled a list of thinking traps that can convince you of impending doom:

  • Catastrophizing: Jumping to the worst possible conclusions. “If I don’t pick the right stock right now, everything will be gone.”
  • Mind reading: Trying to guess what other people think. “Other traders think my portfolio is not good enough.”
  • Fortune telling: Imagining future events without any clear basis. “I have bad luck, so every stock I buy will plummet.”
  • Black-and-white thinking: Seeing things in extremes. “I’ll either be extremely rich or extremely poor.”
  • Overgeneralizing: Making a statement about something that is too general. “One time, I had a losing trade when I picked a stock from the fintech sector. I must never trade in this sector again.”

Fear of losing out

If you’re afraid of losing funds, it can trigger all kinds of irrational moves. The best-case scenario is just freezing and doing nothing. What’s worse is delaying your execution or timing strategies, which actively contributes to you losing even more capital. 

Of course, no one wants to lose. But as long as you accept that it can happen sometimes, you’ll have more confidence in your decisions. One loss won’t put you off track; quite the opposite — you’ll see it as a natural progression of your trading journey. 

Here is a trick to overcome this fear: make small trades. It’ll teach you that even sound strategies don’t always generate winning trades, and you’ll keep your overall losses to a minimum.

Fear of missing out

If you are always on the lookout for the next big thing, you’ll probably develop FOMO. Wherever you go online, you can’t seem to escape traders raving about a groundbreaking project and saying you should get in early. Even if you disregard it the first few times, you may start feeling jealous of others’ success and, you guessed it, making unreasonable trades. 

If you see some stock trending, don’t buy it just because you’re worried about missing an opportunity. Apply the same analytical approach you normally do. If you evaluate the stock and it seems promising, you should join the trend. The difference between that and FOMO is that you don’t let the market sentiment make decisions for you.

Fear of profits turning into losses

This fear can force you to cut your favorable positions before they generate a meaningful return, i.e., too early. The advice given to traders to resist this impulse is “let your profits run.”

At its core, the urge to lock your profits is not bad, just like limiting your losses. But if you’re too cautious, trading will no longer be financially viable. If you’re a conservative trader, consider taking profits at the target objective using a take-profit order. If you’re more motivated to take advantage of the market, you can place a trailing stop to ride the trend and avoid taking profits off the table.

Here are some good reasons to sell your assets, which have nothing to do with fear:

  • You regret buying them in the first place.
  • Their value has risen dramatically.
  • The asset has an unsustainable trading price.

Fear of not being right

This mindset can also manifest itself as the fear of not doing something right or the fear of not being good enough. If you become so wrapped up in your trading performance that any setbacks affect your self-worth and mental wellbeing, it’s a bad sign. There is nothing wrong with seeking and savoring achievements or generating meaningful experiences from trading. Just accept that being sometimes wrong doesn’t mean you’re a bad trader.

You need to remind yourself that the goal is to be right in the long-term perspective, not at each given moment. You can make a few mistakes right after reading this article. What’s more important is whether you made progress in the last few weeks and months, whether your trading gains exceed your losses — other things are just distractions.

If you feel emotions getting the better of you, end your trading session early. Whether you day trade, swing trade, or invest, you need to adopt the right mentality: one that doesn’t allow emotions to make your decisions.

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