How Fear Can Ruin Your Share Trading Strategy

Alan Greenspan_shock

Fear can be debilitating.

It can stop you from doing the things you want.

I remember a time when fear stopped me in my tracks. It was nearly 20 years ago. But I still wonder what could have been.

I was holidaying with a couple of mates in Cairns. We’d done just about every action sport the tropical north had to offer — rafting, bungee, diving…you name it.

Then, on our second last day, we saw an ad for something we hadn’t done — skydiving.

I’d been keen to do everything up until this point. But jumping from a plane was another thing entirely. My anxiety levels were rapidly rising.

I joked along as one of the guys made the phone call. Secretly, though, I hoped it would be too late to get a booking. But no luck — we were set for an afternoon jump.

Within an hour we were in the briefing room. 30 minutes later we were suiting up. Just half an hour after that we were with the instructors beside the plane.

Things were moving fast — there was no turning back.

But fate was about to step in. The tower radioed the pilot. An approaching front was reducing visibility in the jump zone. There’d be no more skydiving for the day.

My relief was indescribable. I was off the hook.

The skydiving school called us the next morning. They said the skies were clear and they were ready to take us up. But I wasn’t going back. Fear had won.

My mates pressed on. They tell me skydiving was one of their greatest experiences. Freefalling from 12,000 feet was something they’ll remember for life.

Do I regret pulling out? Yes. I let fear overwhelm me. I let fear hold me back.

History repeats

My wife and I recently took the kids to the Sydney Royal Easter Show. At the top of their to-do list were the rides — many of which were bigger and faster than ever.

Our two eldest are 11 and nine. They knew exactly which ride to hit first. It was very high, with lots of spinning and tumbling bits. The sort of ride only a youngster can appreciate.

They lined up, gave their tickets, and took their seats…

Then they got off — before the ride began.

Fear got them. I saw myself 20 years earlier, standing beside the plane. I’d been there before.

We had a chat about it over lunch. They said they really wanted to go on the ride, but they were afraid.

I told my boys it’s good to do things that scare them (when the risk is acceptable). That’s how we move forward and get better. I also said that doing scary stuff gets easier with practice.

And it worked. The boys went on the ride and had a blast.

I’ve had to face fear many times in my career. Chances are you have to.

I remember the fear of taking my first trade for the bank. I remember the fear of starting a business from scratch. I remember the fear of using my own capital to trade futures markets.

What if my best effort didn’t work out? The fear of failing was always present.

But here’s the thing. I can’t think of a time when facing my fears led to disaster. Sure, I wasn’t always successful. But I’ve never done something challenging and looked back with regret.

There’s no doubt in my mind — learning to manage fear has made me much better off today.

Taming the beast

I want you to read this next email. It’s from a member at breaking point. Fear is overpowering his will to trade.

This is what he says…

I’m mentally beating myself up every day. Quant trading really got my interest when I first heard of it. I read all the information and then took the chance to join. My plan was for a long term commitment. It seemed like a natural extension to my real estate investments.

I completely get the concept. But that’s where it ends. I just can’t let the trades run, and I can’t go short. I’ve had a few goes, only to get cold feet. I just don’t have the nerve. That’s the brutal truth. And I hate owning up to it.

Member, Ian

Ian’s not alone. This is something many traders experience. They simply can’t follow their trading plan — not due to a lack of discipline, but because of fear.

Research has found that fear can lead to poor decisions. And one of the worst things a trader can do is ignore their trading rules. This is a sure-fire way to fail.

Now, I’m not a mental health specialist. But I do know about fear when it comes to taking financial risk. This is something I’ve had to work on over the years — many traders do.

The truth is you don’t need a high risk tolerance to trade. There are things you can do to override fear. This makes it possible to keep going when others stop.

So what do I do?

First, I need to know my downside. Understanding the risk is a bit like turning on the light — all the scary stuff goes away.

You see, a big part of fear is worrying about the worst possible outcome. But if you know the worst likely result — and if it’s not that bad — then you remove the fear factor.

The second step is good position sizing. This can make all the difference.

Now, position sizing is a big topic. I can’t do it justice in a few lines. But let me say this: I never risk more than I care to lose. A loss will rarely cause me a second thought.

Think about this for a moment. It’s an important piece to the puzzle.

Fear is a response to possible danger. The key is to reduce the potential loss to a level that doesn’t matter. This shuts off fear’s fuel supply — it can never get going.

It’s all so clear when I look back. The scariest part of skydiving was in my head. My fear was due to the slim possibility it would end in disaster. I was unduly focusing on the downside.

And that’s how fear works. It creates a negative bias that can pin you down. As I tell my kids, do something scary. Chances are you’ll be glad you did.

Until next week,

Jason McIntosh

Editor, Quant Trader

Editor’s note: Are you struggling to consistently make good profits? If so, you should check out Jason McIntosh’s Quant Trader advisory service. It’s a fully algorithmic trading system for ASX stocks. Quant Trader scans practically every company. I can just about guarantee you’ve never heard of many of these unique ideas.

If you’re not familiar with Jason, he was a trader at one of the world’s most powerful investment banks for nearly a decade. He’s seen dozens of market corrections and crashes. This experience is hard coded into Quant Trader’s algorithms. And the results speak for themselves.

So if you’re not sure when to buy or sell…I strongly suggest you look into Quant Trader now.

Try it. See if it makes sense to you. It could change the way you trade forever.

Jason McIntosh

Jason McIntosh

Jason is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.

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