This is How I Beat the Fear of Share Trading

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Luna Park is a Sydney landmark. It occupies a prime piece of real estate at the foot of the Harbour Bridge. The park’s huge smiling face has been a local icon since 1935.

My mates and I were regulars as kids. We would slide, whirl, and twirl our way around the park for hours. Our only limit was the supervising parent’s patience.

Every visit had a similar script. There would be some crazy challenge to outlast each other on the most ‘dangerous’ ride. What could be more fun?

No ride was too scary. It had to be either high, fast, or spin at a terrifying speed to grab our attention. We were fearless — there was never a moment of hesitation.

But that was then. Thirty-five years on and it’s a new world. I’m now the supervising parent, and my kids are the daring thrill seekers. It was time to return to Luna Park.

So off we went during the school holidays. Some of the old style attractions haven’t changed a bit — they are just as they were during my roller-coasting prime.

But the kids didn’t want to know about these. At least not first-up. No, it was straight to the newest ride — the Hair Raiser. And they were hauling me along with them.

Now my tolerance for extreme rides isn’t what it once was. It would have been easy to stand aside and watch. But soft options are rarely the most satisfying.

The Hair Raiser is a free-fall experience. First, they tightly strap you into a seat…so tight your arms can barely move. A cable then lifts you to the top of a 50-metre tower.

Then — without warning — it drops. You feel completely out of control. I was at the mercy of the ride. This made me very uncomfortable. I don’t like being powerless.

Do you know what we did next?

We got straight back on.

Sure, the ride was creating mild anxiety. I also had no physical influence over the situation. But I still had mental control. You see, I knew the ride was safe. No harm could come to us.

Knowing the risk of injury was miniscule made all the difference. It allowed me to override my fears. I was able to go forward when my natural tendency was to step back.

When fear takes the wheel

Fear is a vital emotion. It’s our brains response to potential danger. Without fear, we couldn’t protect ourselves from legitimate threats.

But fear can get out of hand. It can hold us back unnecessarily. A strategy for dealing with fear is essential.

I received an email last week from a member. His fear of trading is overwhelming. It’s at a stage where he’s ready to walk away.

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 fear is about losing money. And he’s not alone. I’ve seen this type of fear hold back many traders. They simply can’t follow their trading plan — not due to lack of discipline, but due to fear.

Research has found that fear can lead to poor decisions. And one of the worst things a trader can do is to regularly break 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.

I describe myself as being slightly risk adverse. My lawyer laughs at this. He says it’s impossible for a futures trader be anything but an extreme risk taker.

But he’s wrong. Many of the best traders say managing risk is their biggest concern.

Cutting fear down to size

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.

My own fear is of a sudden extreme loss. One so big that it takes me out of the game. I simply couldn’t trade if I let this fear take hold.

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.

There’s an old German saying: Fear makes the wolf bigger than he is. And it’s true. Fear lets the imagination run wild. It will give you an excuse to hide.

But it doesn’t have to be this way. If you know the risk — and it actually isn’t that bad — you’ll quickly cut the wolf down to size.

Until next week,

Jason McIntosh

Editor, Quant Trader

Editor’s Note: Did any of your stocks hit a record high last week? Chances are the answer is no. And that’s understandable…it’s been a tough time for the All Ordinaries. But some stocks are surging. They could make a big difference to your portfolio.

Take Blackmores [ASX:BKL] for instance. Last week it smashed above $100 per share. And that’s good for Quant Trader’s members. You see, Quant Trader signalled this stock three times — at $33.93, $39.00, and $44.00. The first entry is up over 200%.

Anyone can get gains like these. It’s all about having the right strategies. You can learn more about these here  in a previous article of mine, ‘Trading is an Eagle’s World’.

The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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