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How to Overcome Fear and Emotions in Trading

Tag: trading emotions

Whether you’re a complete newbie or you’ve been trading for some time, you have likely experienced fear and other emotions while trading. If you haven’t, you might be robot. It’s natural to experience these things because we are human and subject to the pulls of the flesh. In this post, we’ll uncover 5 ways you can overcome fear and emotions in trading.

The Root of Fear and Emotional Problems in Trading

As humans, we are naturally predisposed for certain emotions. Psychologists often label these with cute labels like scarcity bias or one of a myriad of other biases. To them, we are subject to the habits ingrained in our dna.

For example, we are prone to think as humans that if we don’t store up for hard times, we might not have enough to get through the winter, or drought, or famine, or whatever. As our ancestors were more agrarian than we are today, we have a tendency to associate other aspects of our lives with similar biases — like trading profits instead of crops.

In a similar way, if we suffer loss, we are likely to take what little gains we come across more quickly the next time. Think about losing a girlfriend, or a loved one. It may traumatize you to the point that you want to “cling” to the next potential suitor more tightly than the last.

Unfortunately, the very thing that we are wired for can often times sabotage our intended outcomes. By clinging to the next lover too closely, we might actually push them away.

It’s not different in trading.

If we suffer a few debilitating losses, we are wont to “cling” to whatever gains we have the next time. The end result is that we cling to our profits too quickly and thereby continue “pushing” our lovers (potential gains) further and further away.

How to Fix the Issue of Fear and Emotions in Trading

Well, it isn’t as easy as one might think. It’s often quite painful actually. However, the antidote is often in the sickness itself — much like any disease.

Think about it this way. To become immune to something, what has to happen? Exactly, you have to get sick. You have to be exposed to something repeatedly in order for your body to build up immunity to it. It’s like this with viruses, bacteria, cold weather, callouses on our hands, etc.

Trading is pain

The goal is to normalize the pain in an effort to make more sound decisions. In the case of the clingy boyfriend, the loss of your lovers will eventually teach you to let go a bit and give them some space. Jealousy is the cure for itself.

Trading losses will over time cure your habit of fear in one of two ways:

  1. It will teach you that your fears are irrational with enough experience.
  2. You will eventually find another line of work once your capital is completely expended.

One way or another, you’ll learn that fear isn’t profitable.

That being said, there are a handful of ways to proactively train yourself to mitigate the fears associated with trading.

1. Mitigating Fear and Emotion in Trading through Education

We humans have a big ego. Whether we realize it or not, we think we can jump right into something we know nothing about and become an overnight expert. Just like the little kid who sees his dad wielding a sledge hammer with ease, we think we can pick it up and do the same thing. “Go ahead, son….”

Little do we realize that more often than not, when we think we know something, we actually understand very little.

This is where education can help. Often times, awareness is the beginning of our enlightenment and path toward freedom. In trading, this can come through the help of books, courses, or free online content.

Trading Education Books Can Help You Overcome Fear and Emotions in trading
Trading Education Books

The great thing about pretty much any line of work is that usually someone has gone before us and made the mistakes. Not only have they made the mistakes, but many have documented their mistakes. And in this day and age, we have information at the tips of our fingers. So, why not take advantage of that?

The more you learn about technical analysis, other traders’ successes and failures, and the many pitfalls of the human mind, the more you’ll be prepared to face your own demons. We discuss a lot of topics in our blog here at TradingSim.com, but there are a ton of free resources on the web to help you as well.

2. Learn and Master a Single Strategy to Overcome Fear

Prop trading guru Mike Bellafiore is famous for teaching his traders to make “one good trade.” That’s all it really takes to get rich in trading. It’s so important, he framed it and hung it inside the prop firm.

SMB Capital One Good Trade Poster
From SMB Capital Prop Firm

Mastering a single strategy is a lot like getting married. You learn more about a person when you marry them, live with them day in and day out, commit to them for the long haul. Traders who don’t commit to a single setup often times suffer from “style drift.” Eventually, they begin to doubt their ability to succeed at trading.

Like a fickle relationship, they give up on the strategy when it isn’t doing well for them.

The problem with this, just like in relationships, is that you never find a deeper understanding of the strategy. You only stick around during the good times. But like life, the good and the bad always ebb and flow. Instead of becoming a master at something, you become mediocre at a lot of things.

Adapting with the Changes of the Market

Mastering a strategy isn’t an excuse for ignoring other opportunities for success, or variations to your strategy. It is simply an opportunity to reduce the amount of fear you have through deep familiarity.

By all means, study another strategy once you have mastered one. But understand that true confidence comes through mastery, and that can only be had through focus. It won’t come from mimicking another trader, or following an alert service.

It only comes from mastering something so well you could do it with one hand tied behind your back. (Assuming you could click the buy and sell button with the other hand….)

3. Practice Trading to Increase Confidence and Eliminate Fear

Practicing trading is akin to back-testing. Both have their place along the path to confidence in trading. There are two reasons for this.

  1. Practicing trading builds situational awareness and pattern recognition
  2. Back-testing (and outcome testing) provide statistical evidence of an edge

Both of these are the ingredients you need in order to eliminate fear. Why? Because you no longer have uncertainty about your edge probabilities.

We discuss how to find an edge in other posts, but suffice it to say that you need one in order to mitigate fear of trading. As humans, we want certainty in life. We want a paycheck. We want to know we’ll have food on the table, a roof over our head, etc.

“When you achieve complete acceptance of the uncertainty of each edge and the uniqueness of each moment, your frustration with trading will end.”

Mark Douglas

Trading is never certain. Period. Accept it.

Acceptance of the Risk Eliminates Fear and Emotions in Trading

An edge is a probable outcome that favors you over time. It doesn’t mean you’ll never suffer losses. Sometimes the best traders lose many more times than they win. However, they understand that their wins will far exceed the small losses that they take.

It’s all a game of risk management and knowing the outcome will take care of itself over time.

Without accepting the risk involved, or knowing the statistical edge you have, you’ll remain mired in fear. You’ll take losses much bigger than you need to, and you’ll take profits much sooner than you want. It’s that simple.

Practice trading in order to train your mind and develop your statistical edge.

4. Start with Smaller Size to Decrease your Anxiety in Trading

Improper sizing is often the #1 culprit for destroying your account. It’s true. You want success so badly that you think you’ll get there faster if you just “size up.”

Ironically, the very thing you want becomes your Achilles heal. It’s like the old adage of wanting to run before you walk. You have to start slow and incrementally increase your size as your account, consistency, and most importantly, knowledge, begin to grow.

In a recent SimCast interview, we spoke with Kris Verma about how he uses the Kelly Criteria to properly calculate a position or stake. If you haven’t had a watch, it’s really eye opening.

But whether you use an R factor for your positioning, or calculate a 1% account stop loss for your stake, the more you respect this, the more you’ll overcome fear.

Size up too much and the volatility of your account becomes too big for your emotions to handle, as shown in this chart:

Kelly Criteria for Optimal Position Sizing
Kelly Criteria for Optimal Position Sizing

As you can see, as you increase your Kelly stake from a full “1.0” size, the more your returns diminish and your volatility increases. Take the goldilocks approach and start out conservative. Prove to yourself the right to earn more size based upon your back tested data and performance consistency.

For a basic formula to calculate your Kelly Criteria, click on Kris’s free spreadsheet:

https://docs.google.com/spreadsheets/d/1jWOosTftcxuqmcPE8IbzrcyGJYykIye3OeYAFSZHkyQ/edit#gid=0

5. Trust Yourself. Let the Game Teach You to Overcome Fear and Emotions in Trading

This sounds simple, but it’s not. As a new trader you’re going to have your eyes all over the place: on twitter, on a guru, in a chat room, on your charts, etc. The best place to have your eyes is on the market and on yourself.

Learn to trust your personality. Trade in sync with it. If you need fast gains, then maybe scalping is your jam. If you are a slower mover who needs big wins, then maybe swing trading or longer day trades will work for you.

Whatever your personality, fine tune it with what the market is telling you. It’s ok to study gurus in your spare time, in fact it is recommended, but allow the market to teach you in real time or in simulation. You’ll be amazed at how much more confident you become when you stop the distractions and get a “feel” for the market.

The game taught me the game - Livermore

To that end, you must eventually trust your trading instincts. By this, we don’t mean your whimsical guesses. No, when your education is complete, and your practice is sound, you will have confidence in your own ability to read the market.

Be in tune with it, and trust yourself.

Conclusion

If you find yourself struggling with fear and emotions in trading, by all means do something about it. Realize this is a long game, not a short game. Learn to enjoy the process of education and mastery. Many of the most successful traders took 5-10 years before they ever began making wealth in the markets.

To help along your journey, jump into the simulator here at TradingSim and find your confidence!

Dr. Brett Steenbarger Interview: Learning from our Trading Stress Tradingsim

What is the best way to learn from and mitigate our trading stress? We feel as though this is a particularly important topic for traders, and especially newer traders. And along those lines, we know of no one more qualified to address this subject than Dr. Brett Steenbarger, Ph.D.

After all, Dr. Steenbarger has written the book, or should we say books, on the topic — particularly his last publication Radical Renewal (2019), which touches on this subject in depth and from a spiritual/life renewal point of view.

The ever-popular The Daily Trading Coach and Trading Pscychology 2.0, along with his other publications, offer a timeless approach to mindset awareness and training for anyone trying to tackle the markets.

The Interview

Before we dive into the interview, perhaps the very few who are not acquainted with Dr. Steenbarger’s work should also know that he has been in the business of coaching traders, hedge fund managers, and the like for decades. He is a trader, himself, who got started in the 70s. Through the years he’s been a mentor to many trading legends.

To that end, rest assured that he is very in tune with the markets, traders, and the struggles that traders face. In essence, he’s seen it all. And his recommendations on “learning from our trading stress” may actually surprise you.

We are very thankful he is willing to take time out of his busy schedule for us.

1. TradingSim Question

On that token, what do you say we get kicked off here with a discussion of the common emotions that you find inherent in trading, Dr. Steenbarger? You’ve mentioned in your writings before that the big 5 are typically “nervousness, tension, stress, fear, and worry.” 

Why do you think trading solicits these emotions so easily? Are there any specific triggers in the markets that produce these feelings of “trading stress” within us?

Dr. Steenbarger

Thanks for the opportunity to share ideas with the TradingSim community, John! 

I would add two common emotions to that list:  overconfidence and neediness. 

Indeed, it’s often because of our need to make money and our overconfidence that we pursue shortcuts in our learning processes as traders and take too much risk.  That leads to volatility of P/L and losses, which in turn trigger our nervousness, tension, stress, fear, and worry. 

What I’ve long liked at TradingSim is the focus on learning trading–and doing that in safe ways where we can’t trigger and traumatize ourselves. 

Think about every performance field:  athletics, acting, music.  In none of those do we start out by following people online, doing some reading, and then trying to make a living from our performance.  Rather, we recognize that it takes years of practice and mentoring to become a professional athlete, movie star, or recording artist. 

When we take shortcuts in the development process, our unrealistic expectations set us up for disappointment, frustration, and pain.  

Dr. Brett Steenbarger, Ph.D.

Many, many times the answer to emotional disruptions in trading is to work on our trading. 

As I recently emphasized in an online post, the only losing trade is one that we don’t learn from.  Our job is to keep our capital intact while we’re learning new things, and often that means starting out in simulation mode.  Only once we gain successful experience in practice are we ready for prime time. 

All the work in the world on our mindset is not going to provide us with the skills we need to succeed in a competitive marketplace!

2. TradingSim Question

You raise some really interesting points there, Dr. Steenbarger. I, particularly, like the analogy of trading to “athletics, acting, and music.” We recently discussed this in a post that dealt with having realistic expectations to curb the disappointments in our trading journeys.

But what stands out to me the most is your emphasis on training until “we gain successful experience in practice….” I’d like to build on this topic with two questions for you. 

To preface: many in this industry claim that simulated trades cannot prepare you for the emotions of real trading.

1. What is simulation actually good for, and how should traders actually “train”?

2. Can simulation create a false sense of success for traders?

After all, sparring in a sweaty gym in Brooklyn is all fun and games until you get socked in the mouth by Buster Douglas in front of thousands of spectators with your reputation on the line. Kudos if you get the reference. 😉

Dr. Steenbarger

Well, John, I think you and Mr. Tyson have a great point.  Having a plan in the calm of the moment is different from maintaining and acting on the plan once we get punched in the nose! 

That doesn’t make simulated trading worthless, however.  Even the best boxers practice in the ring away from formal competition to work on their movement, their combinations, etc.  Similarly, basketball teams prepare for the next game by scouting the opponent and then practicing against the offense and defense that the opponent are likely to use. 

And, of course, where would a Broadway actress or actor be without practicing lines away from the distraction of crowds. 

Every performance domain relies on practice away from formal competition to build performance in the heat of the moment. 

Dr. Brett Steenbarger, Ph.D.

That is what simulation accomplishes in trading.  If we can’t be consistently successful in simulation mode, how in hell are we going to succeed with the pressures of real-time P/L?? 

Once we establish our consistency in sim, then, of course, we want to go live and tackle the pressures of actual gains and losses.  This is why musicians and theater professionals conduct dress rehearsals.  Simulation/practice is necessary for development, but not sufficient. 

It’s a step in the learning process.

3. TradingSim Question

Fair enough. So simulation definitely serves a purpose for learning from our trading stress, and I get the comparisons. Point well taken.

I think for many traders, though, there is a struggle to maintain “discipline” within a simulated environment. Yet, what I wonder about this type of trader is whether or not they are actually disciplined while trading live.

To build on the point I’m trying to discover, my assumption is that the more successful traders, boxers, actresses, will take their training just as seriously as their live performances. And if that is true (again, I don’t know), then what we will likely see is that discipline in training is a key indicator of earlier success in the markets. In other words, those who take their training seriously are more prone to reach consistency faster, versus those who dismiss it as “play” and end up failing out of the markets because they are seeking the thrills associated with gambling (even if their intention isn’t to gamble).

As someone who has worked with 1000s of traders over the years, have you observed any connections with traders who lack discipline in both “training mode” and “live mode”?

Dr. Steenbarger

If what an actor is interested in is applause, he won’t be particularly motivated to practice on an empty stage.  If what a trader is interested in is profits, he/she won’t be particularly motivated to practice in simulation. 

It’s not simply a matter of discipline.  It’s about the underlying motivation driving performance efforts. 

If you’re motivated to learn and master markets, you’ll enjoy simulation and playing with trading ideas.  If you’re motivated by making money and showing off pictures of your new cars on social media, simulation won’t hold much appeal. 

When surgeons learn new techniques, they practice on models and cadavers before “going live”.  If a surgeon told me he didn’t think such practice was important, I’d likely look elsewhere for my procedure….

4. TradingSim Question

Wow. Process over outcomes. I need to review that a few more times to let it really sink in. There’s so much there.

The underlying driver of trading performance is motivation “to learn and master markets.” That’s brilliant. And you compare that to ego: Ego vs. Enjoyment/Diligence.

To that point, a lot of motivation research is centered around the attitude of the learner toward the subject matter. It sounds like trading is no different.

Can proper motivation and attitude in trading be fostered? How about self-efficacy? This reminds me of some of your great work on visualizing the ideal self, and setting goals and concrete “efforts at improvement.”

Dr. Steenbarger

Yes, I see that in training programs, such as at prop firms like SMB and at hedge funds where there is mentoring. 

The motivation and attitude are modeled for new traders and they learn the right activities and mindset. 

The key is emphasizing professionalism and sound process, rather than P/L.

5. TradingSim Question

That makes sense: proper modeling and mentorship leads to right actions and mindset.

And circling back to the topic of the interview, “Learning from our Trading Stress,” I assume it is within this setting of training programs that traders receive the ongoing mentoring and feedback they need to overcome the hurdles they may not have expected. Perhaps they are pushed to move beyond their comfort zones, or the thinking that markets are “easy,” and to then take the steps necessary for practice and refinement of their craft.

Is this the only way to progress? You and I spoke briefly before about the concept of suffering and how that can sometimes bring about the cessation of bad habits. Are many of us without these resources and training just prone to learn the hard way?

Dr. Steenbarger

I do think that learning curves are accelerated when working in team environments. 

There are online trading communities that serve this function, where you can learn from the experience of others–including their mistakes. 

If you look at most performance fields, it’s only a small percentage of participants who can make their living from their craft and those that do are those that receive mentoring in dedicated training environments. 

Dr. Brett Steenbarger, Ph.D.

We can learn a lot by seeing how Olympic athletes, military special forces, and other elite groups develop their talent. 

In this context, I don’t think the challenge is learning from our suffering.  Rather, much of the suffering comes from trying to develop expertise in suboptimal learning environments.

6. TradingSim Question

That’s an interesting perspective that suffering, or trading stress, stems from “trying to develop expertise in suboptimal learning environments.”

To that end, would it be beneficial for new traders to explore communities and mentors until they find their own niche? Their own “team,” as you say?

And one other follow up, if I may. Do traders have to reach “elite” status to make it in this business? Is there an in-between that can still afford a living?

Dr. Steenbarger

If I were a new trader, I would look for a formal training program with a solid track record of training talent.  That would maximize the odds of success. 

And, yes, I would say that making a living from trading *is* an elite level of success.  I think that’s true in chess, golf, acting, music, creative writing, etc.

7. TradingSim Question

I suppose that explains the 90% failure rate we often hear about.

Are there any other ways to learn from our trading stress that we may not have touched on? We’ve discussed teams, mentors, training, simulation, motivation, attitude.

Perhaps exercise and balance of life? Some stimulus from outside of trading?

Dr. Steenbarger

My most recent blog post is relevant to the topic: https://tinyurl.com/4ypkmmm7 .

8. TradingSim Question

Hey, that’s a great one! Thanks so much for sharing that link. 

It is important to step away from trading to refresh our views of markets and rejuvenate.

Dr. Brett Steenbarger, Ph.D.

Closing

Thanks so much for your time and wisdom, Dr. Steenbarger. It has been a pleasure and an honor to have this discussion with you. Learning from our trading stress is such an important topic, and I know it will be a huge boon to the community here at TradingSim.

Key Takeaways

It is quite clear that Dr. Steenbarger is a firm believer in quality training. After all, he’s seen the effect it has on traders who succeed in learning from their trading stress, and those who eventually succumb to it.

To that end, we hope those of you reading will take home some key reminders when confronted with the emotional struggle of trading. Here are a few of our favorites:

  • Don’t take shortcuts in your development process
  • Find a quality team, mentor, and training program
  • Discover your enjoyment for the process of discerning the markets
  • Be a professional
  • Practice with intention
  • Take time for creativity, rejuvenation, and time away from the market

More Resources to Help “Learn from our Trading Stress”

For those of you who are interested in more great content and resources from Dr. Steenbarger, be sure to check out his blog at traderfeed.blogspot.com.

Dr. Steenbarger's Homepage

You’ll notice a search bar in the upper left hand of his homepage that can be a great tool for searching the myriad of topics he discusses on the site.

Also, be sure to follow Dr. Steenbarger on Twitter. His handle is @steenbab.

Lastly, if you are looking for a great place to test your strategies in the market, we hope you’ll give TradingSim a try. With over three years of intraday, tick-by-tick market data and L2 replay, along with a dynamic market scanner, there is no better place to build your confidence in trading.

Here’s to good fills!