Four steps to mastering your fear of trading

eyes-312093_640Every trader faces fear, sooner or later. In a perfect world, we’d be fearful at exactly the right times and use that fear to manage our risk, but we all know it doesn’t work like this–markets naturally seem to provoke the “wrong” emotions at the wrong turns, and following those emotions blindly can get us in a lot of trouble. For some traders, fear can be nearly debilitating, and this is as true for purely systematic/quantitative traders as it is for discretionary daytraders. Today, I’ll share a few ideas that have helped me, and many traders I know and have worked with, to manage the emotions of trading. Probably nothing I write today is my own, original work, but I’ve kept the most useful tools and ideas I’ve assembled from many sources.

  1. Acknowledge the fear and allow yourself to experience it. There’s a natural tendency to avoid our fear; we aren’t that much different from the child who knows monsters lurk in the darkness under the bed, but pulls the covers over his head to avoid looking. While this is a very effective strategy for children dealing with monsters at bedtime, it is not so effective in most other walks of life. The first step is to allow yourself to experience your fear, and one of the ways to do that is simply to say “I am feeling fear.” (Notice that we do not say “I am afraid.” You are not your fear, and that’s a critical distinction. You are experiencing the emotion of fear: “I am feeling fear.”) Whatever works for you, just invite that emotion of fear to be fully present in your experience–this also has the effect of grounding you in the “now” and bringing you into a mindful awareness of the present moment. It just so happens that this present moment is tinged with fear, but that is perfectly fine. However you do it, first, allow yourself to fully experience the fear.
  2. Ask if the fear is there for a reason. Fear often serves a good purpose. The Darwin Awards (would I date myself too much if I said I remembered the early days of this Usenet phenomenon, when the cost of connecting was a long distance phone call for my Apple II modem?) are full of humans who probably should have had more fear at critical points in their existence. Though we usually are not going to reason fear away–it is counterproductive to try to reason most emotions away–there’s a good chance that your fear is telling you something. Are you afraid to put on 25 long positions and no shorts in stocks, risking 2% on each trade? Are you afraid to put on 5 large currency pairs in the same direction against the USD? Do you have some issues with all that naked short option premium you just sold? Good. Listen to your fear; it’s telling you not to be stupid. On a deeper level, do you have a nagging fear because you might be trading without an edge, are undercapitalized, or are simply doing something that doesn’t work? Your fear might be doing something useful, and it’s worth thinking about that before we try to casually dismiss that fear.
  3. Inflate the fear to ridiculous extremes. This might seem counterproductive, but asking “what’s the worst that can happen?” can be a useful step. In some cases (see the questions in point #2), the worst that can happen is unacceptable, and you might need to take some steps to manage that worst case scenario. In many more cases, we see that the fear is unjustified, and that the possible consequences are out of proportion to the fear. Allowing your fear to expand to extremes (remember point #1 we are not afraid of that fear nor of experiencing it) can often make a cartoon mockery of that fear, and it will naturally release. You might even find yourself laughing at the fearful state you were in just a few moments before, and fear has a very difficult time surviving where there’s laughter. If nothing else, this step will help you to understand your fear on a deeper level.
  4. Work on releasing the fear. There are many ways to do this. In two podcasts (here and here) I talked about the Sedona Method, which is a simple, targeted method to release unhealthy emotions. It’s so simple that you might overlook it, but it can be powerfully effective. Give it a chance, or maybe simply take a few deep breaths and allow the fear to dissipate. There’s no right or wrong here–managing emotions is a personal journey and we all find what works well for each of us.

I think that’s it. Those few, simple points can reshape your experience of fear in trading. As a parting thought, let me remind you that we are not going to eliminate emotions in trading, nor would that be a productive outcome. As humans, every decision we make includes some mix of rational analysis and emotion. Many traders find fear is an essential emotion in trading, but there are different kinds of fear: if you are “white knuckling it” through trades, or experiencing a high “pucker factor” every time you look at a chart, then you won’t be able to trade effectively–the emotions of trading will drown everything else out. Everything in its place, in its time, and in the correct proportion. These simple ideas will help you get there.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 3 Comments

  1. Adrian

    I am not in the position to add anything or disagree with Adam on his advice on how to deal with emotions in general or fear in particular.

    I would argue though that fear should not be a concern (or at least, it should be a much smaller concern) if you are a systematic trader, because in a no-decision-making-required way of trading, your emotional state is irrelevant. (In a worst case scenario, fear can make a systematic trader stop trading, and close his account. Fear can also make a systematic trader become a discretionary trader, but all bad things that could happen after this moment, I would count them as weaknesses of the discretionary, not of systematic, trading.)

    Brain science is a field in its infancy, every report should be taken with a grain of salt, correlation does not imply causation and so on. Still, a layman like myself can read about how under fear stimuli amygdala changes the chemicals in the brain, maybe entire areas of the brain (frontal lobes, evolutionary new parts of the brain, those involved in rational thinking) are inhibited or shut down completely, all these happening very quickly, even before we are consciously aware of this feeling of fear. We all know about these experiments showing we make a decision before we are aware of that decision, and most of the times what we call a conscious decision making process is only a rationalization of an already taken decision. Or that observation of patients with damages in emotions generating areas, so they were not able to feel emotions anymore, but still having the rational thinking capabilities unaltered, which patients were facing big difficulties in making even very small decisions – suggesting that maybe somewhere during this decision making process, at a conscious or subconscious level, emotions always play a role.

    Finding about all these, I am still asking myself if we really should put systematic and discretionary strategies on the same level of desirability. It’s very clear for me which are the benefits of always applying the same plan that you know should work over having to make a new decision every time, each time there being a slightly different version of yourself, a happier you, a more fearful you, a more cortisol-abundant you or a less serotonin-abundant you. But I can’t see the vice-versa benefits.

    I had the same dilemmas here on the blog in the past, too. Let’s go 1 step further now and only rhetorically let me raise this question: do we talk about successful discretionary strategies only because they (as opposed to successful mechanical strategies) are not falsifiable? And since they have this wishful-thinking sustaining property, we will never have any ante-factum proofs that they don’t exist, so our hope to achieve this Fata Morgana can remain intact?

    (Yes, reading between the lines, you can find the frustration of a systematic strategy seeker. Applying Adam’s #1: I am feeling frustration.)

    1. Adam Grimes

      I think you make good points here (and in a previous comment where you said a few things that were similar to this.) What I disagree with though, is the desire to throw out discretionary inputs because they are subjective. If anything, I probably err on the side of attempting to quantify too much and distrusting things I can’t nail down. Long ago, I made a decision that I’d rather have my mistakes be on that side than believing in magical thinking. But I’ve also kept an open mind, and I’ve explored some fringe areas of perception and decision making at the same time I’ve worked to drill ever deeper into quantitative work. The results have been mixed, but what I have seen is that my discretionary inputs add to the process. Simply put, I’m better off combining my skills reading the market at some points with quantitative tools than I would be using either alone.

      Is it just that I haven’t done either to the appropriate depth or level of mastery? Is it possible that I could quantify many of the elements that I think are stubbornly subjective? Perhaps… maybe it’s even likely this is true… but I would at least encourage you to think (and you are) that there might be some types of processing that humans do naturally, easily, and perhaps subjectively that could add to the process.

      (Footnote: it is falsifiable. If I think I can outperform a raw quant screen all I have to do is collect a few years of combined data and compare it with the raw quant data. Within the appropriate confidence intervals, we can see if there’s an edge or if I should just stop messing with it and let it run. So, it certainly is quantifiable if one is willing to take the time and do the work.)

  2. Jake

    I also find the Sedona Method very helpful. Good stuff Adam.

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