Drop Fear From Your Trading System

Fred has been trading for eleven years. He is technically minded and loves numbers. He analyses patterns, cycles, support and resistance levels, Fibonacci retracements and range extensions. 

He trades Australian and American Equities and thoroughly enjoys it. There is only one problem. He is not making money. The trading system he has, which is based on his history, churns out more losers than winners. In fact, the accuracy of his system is abysmal. Nine out of ten signals it generates end up being incorrect and leads to the depletion of his trading account. Nine out of ten!

What would you do if you were in his shoes? What advice would you give him if he came to you and asked for help?

Let’s put a bookmark in Fred’s story. We will return to him in a short while.

Let’s look at Fear. Yes, the “F” word. What is fear? It is an emotion that relates to our future. We fear bad things will happen to us. We fear losing money, losing our job, losing our security, losing our retirement funds, having bad returns, having negative returns, losing a relationship. We fear bad things may happen to our children as they grow and move on to their own adventures. We fear losing loved ones, losing status, losing control, losing security. We fear we will have fewer good things in the days to come and more bad things, painful things. What is the common element in these fears? They are all about our future. We are anticipating that something will happen in the future, as close as the next few hours or as far away as our retirement years, but all in the future.

Fear comes in many disguises. Worry is almost a synonym, although those who worry may not like admitting they are fearful. Doubt, the inability to act on the decision ahead of us is based on a fear that our decision, our action may have bad consequences or may not be the best path to take. Uncertainty is another close relative. Shall we stay or go? Shall we start our business or close it down? Shall we take that job or go for redundancy? Which way to go? If I only knew.

Then there is Greed, a fear that there is not enough. There may never be another trade setup as good as this one. Let’s overlook our Risk Management rules and double up. Better still, let’s use ALL our capital on this one trade. It may never be this good again. Let’s grab, let’s hoard, let’s be all-out because we are fearful that this good an opportunity may not come again in the future.

Pessimism is a fear that things will not get better. Hopelessness is pessimism at its extreme, it can never get better.

Fear may be self-focussed too. I am not good enough, smart enough, young enough, old enough, clever enough, fluent with numbers enough, diligent enough, disciplined enough. Because I am not good enough, I will not be able to make this work (in the future).

We have some reasons to be fearful. If we anticipate bad things are waiting for us in the future, we may be able to circumvent them, prepare for them, be ready when they come about. If we worry about what our competition may come up with, we may be able to prepare for it before or as it happens.

But, how often do our fears actualise? Let’s ask Mark Twain. His answer is: “I’ve had a lot of worries in my life, most of which never happened.” That is right. Most of what he feared never happened. Most of what we worry never happens. Why worry then? Why live in fear then? “But I can’t help it.” Yes, you can. Yes, we can.

Let’s look at what may reduce our fears. Knowledge does. Experience does. In training a pilot practices emergencies in a flight simulator. They develop tools, techniques and skills to handle most if not all emergencies.

Information reduces fear too. If we know what the market is going to do tomorrow, next week, next month, next year, next decade, our fears about trading and investing would significantly reduce or completely disappear. Now, we cannot know for sure what is ahead. However, enough testing, enough analysis, enough practice will increase our chances, our odds of knowing what is ahead. And that reduces fear.

Being in the present reduces fear too. If we can recognise that ALL our fears relate to the future, we soon notice that, here and now, we are not in that great a danger. That sense of calmness, that sense of centeredness allows us to make more effective decisions. Just ask Captain Richard De Crespigny and his crew who safely landed QF32 after the aircraft suffered an uncontrollable engine failure on 4 November 2010. Also ask Chesley Sullenberger who landed US Airways Flight 1549 in the Hudson River on 15 January 2009 after the plane struck a flock of Canada Geese.

This is where we return to Fred and his nine out of ten “wrong” signals. It is possible that, like Mark Twain, your fears may never actualise. In fact, it is possible that nine out of your ten fears may well turn out to be false signals.

Would you like to know if they are? If you knew that nine out of ten times you are afraid something will happen, nine out of ten times you worry, it amounts to nothing?

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