Blog_MasterTraderMindset-(1)

Everyone is afraid of something, that’s a fact.  Just that most people in our modern society can hide amongst the crowd, and never have to face their fears. These people usually go through life “existing” and not “living”. One thing I like about trading, is that it tends to bring fears to the surface. At least, that’s what happened to me even though I was not aware of it right away.  My journey to consistency went hand in hand with my journey through my own fears. My fears were effectively blocking me from expressing my true potential in the markets, so I’m sure the lessons I learned and the strategies I used to tackle fear will help you progress as well.

My Journey through Fear

Only when we are no longer afraid do we begin to live –  Dorothy Thompson

When was the last time you approached a total stranger, and just said “Hi, how’s it going?”. Do you have trouble speaking to strangers? You’re not alone. What about standing up and speaking in public? Or maybe you’re afraid of the dark. Maybe you’re afraid of heights…whatever you are afraid of, you are not alone.  And such is true in trading as well.

Here is a list of my own fears that have arisen through trading:

  • Fear of Uncertainty (I can’t control the market, it might move against me)
  • Fear of Failure (I might not be able to trade well after all)
  • Fear of Judgement (what will my parents/friends/co-workers/fiancée, etc..think of me?)
  • Fear of Making Decisions (it might be the wrong decision)
  • Fear of Messing Up (I might be doing something right but I might also mess things up)

And they always translated into this scenario:

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The process was always a version of:

  • do a load of pre-trade analysis
  • try to find a load of reasons why the trade should work

but then…

  • approach clicking the button
  • start to think of all the reasons the trade might not work

and evidently there can only be two outcomes of this process…

  • go back to the drawing board (effectively getting stuck analyzing and never doing anything)

or…

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What you need to understand is that all of the above was totally unreasonable. The market’s movements  dictated how I felt about myself,  how emotional or rational I was, how successful or unsuccessful I felt, and so on.  Effectively, my fear of being wrong and having a losing trade was permeating every aspect of my life.

Trading has allowed me to experience many different versions of fear. So while I may not have theoretical or academic knowledge, I have thousands of hours of practical knowledge. Here is what my conclusions are, and they might not be what you expect:

  • there are “practical” fears such as fear of aging, losing financial security, making decisions, speaking in public, etc.
  • there are Ego-based fears such as fear of rejection, fear of failure, loss of image

but effectively they all boil down to the same common denominator:

“INCAPACITY TO DEAL WITH THE UNCERTAINTIES OF LIFE”.

Any level of fear boils down to a lack of faith in yourself and your capacity to overcome an obstacle. And we hear it all the time! How many times did your parents tell you to “be careful” when you were taking the stairs or riding a bicycle or playing tennis or using the oven? That’s the parents projecting their fears onto you. Then you can decide whether to face them/overcome them or act accordingly, giving into the fear and avoiding certain situations.

But here is the catch. Most fears are not actually dangerous. So before we continue, ask yourself some simple questions. For example:

  • If you are afraid to trade for any particular reason
  • If you are nervous or uncertain about the validity of your pre-trade analysis and cannot click the button
  • If you are afraid of losing money

ask yourself:

  • What happens if I take the trade?
  • What happens if I don’t take the trade?

If the end conclusion of this exercise is Death, then it’s a sensible fear. If it’s not Death, then what are you afraid of? What can you possibly fail to handle?

Fear vs. Danger

If you know the enemy and know yourself you need not fear the results of a hundred battles – Sun Tzu

 

What I want to convey is the realization that fear is not real. Danger is real. Fear is a choice based on some erroneous beliefs that go back to the same underlying feeling of “I can’t handle it!”. But what if you changed your belief into “I can handle anything that life throws at me”, “somehow, in some way, I can deal with it”, “today might not be my day but this will be my week/month/year”.

A few years ago I had a motorcycle.  Fortunately I didn’t buy a Ducati 1098 as a first bike. I bought a Honda CBF, a sport-tourer.  And then I met some people that raced with their bikes often on the track. They started teaching me how to ride well. I also did my own research on cornering, bouncing eyes between mirrors, in front of me, to the side and the importance evaluating a curve ahead of time in order to keep the rear tyre under traction whilst going through the curve and opening up the throttle as the curve opens up. I bought over 1000 Euros worth of protective gear.

I had some talent and after a month, I was already keeping up with my friends and inevitably pushing my luck sometimes. Was I afraid? Did I fear death? The answer is No. After putting in over 20.000 KMs in one year, I had a keen sense of danger and what I could and could not do.  Actually the one situation that kept me on my toes was “parking” the bike or moving it by hand. 225 Kgs is a lot of weight.

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My Honda CBF Model Year 2008 ABS  (yes I did want ABS on the bike)

But that is irrelevant. Because riding a motorcycle is, by all means, risky and dangerous. I knew this, but decided to push fourth anyhow because it was simply too enjoyable and I wasn’t pushing my luck too often.

Then the first warning happened. I was going up a mountain road with a sports car in front of me. He was taking the corners a bit too quickly. I decided not to pass him and remain at a decent distance. As we approached the top of the mountain pass, he had a frontal accident with a car speeding in the opposite direction.  What happened was not thought but instinct. There was a huge “bang” right in front of me.  A bumper flew over my head, and glass shattered upon me as I shifted gears and found space to get safely around the accident before stopping. When I stopped, the first thing I thought was “I’m alive”. The second thing was “I’m one lucky fellow”.  But luck can’t always save you.

I did end up falling after all. And the first fall I had with my motorcycle, I happened to have a guest on board. What happened? I misjudged sunset one day and ended up having to face an ill-lit mountain pass in the dark. I had done it many times already so I wasn’t nervous. However, this time round, at a certain point that day there was gravel on the road, just before a corner. In the dark, I couldn’t see it until I was on top of it.

When you’re on gravel with a motorcycle, you can’t hit the breaks or you’ll end up on the ground immediately. I knew this. But also, you can’t try to bend at all. While I was thinking about what to do, we were approaching a drop-off. I ended up putting us on a miniscule patch of grass between the road and the guard rail, and hitting the brakes there while keeping the bike straight. But the curve was approaching quickly so eventually I had to get back on the road where we wobbled and eventually lost balance. Fortunately we were almost still when it happened.

I broke a thumb, and my passenger was bruised badly on the leg that the bike fell on. But we were alive and OK. After the shock passed, we got the bike up and had to get back on it, complete the mountain pass and get all the way home, which was still an hour away.

Riding a motorcycle in the dark, on a mountain pass, is dangerous and outright stupid. People die because they fail to appreciate the risk of riding a motorcycle. If I’m still alive today, it’s partially because of luck, and partially because I had a very keen awareness of the risks I was facing and in the moment of need, my experience guided me towards possibly the only way to survival. So I did fall. But I was able to handle it. And I had to get right back on the bike and get us safely home at night, despite the fall (and the broken thumb).

Now compare that story with the fear of trading. Does it not seem ridiculous to fear anything that does not put your life in danger?

And yet there are many similarities:

  • Trading and motorcycle riding are two risky endeavours
  • Trading and motorcycle riding require preparation & discipline
  • In trading, if you push your luck, you put your account at risk; on the motorcycle, if you push your luck, you put your life at risk
  • In trading, you know that losses are part of the game; on the motorcycle, you know that sooner or later you will fall.
  • The key to trading is to minimize losses; the key to motorcycle riding is to minimize damage to yourself.
  • If you fall off the motorcycle, the thing you need to do is get back on or you never will and fear will permeate you. In trading, when you get stopped out, don’t think about the loss and just continue on with your business.

But the key difference is that on the motorcycle, you put yourself in danger. With trading, you are only facing fear and not a life-threatening situation. But our brain cannot tell the difference between what is real danger and what is not.

Let go of my Ego

Thinking will not overcome fear but action will – W. Clement Stone

It was harder for me to face the fear of uncertainty and loss in trading than it was to ride a motorcycle. For many people it is harder to speak in public than to go through an Athsma attack.

For others, the fear of the dark is worse than the fear of Death itself. The current rank of the most common fears worldwide is:

  1. Fear of Flying
  2. Fear of Public Speaking
  3. Fear of Heights
  4. Fear of the Dark
  5. Fear of Intimacy
  6. Fear of Death
  7. Fear of Failure

So Death is in 6th place…doesn’t that bother you? And guess who is in first place? This guy:

Fear

Source: Inside Out, Walt Disney Pixar.

Your ego-based fears. But they are not real.  So how do we confront and push through these fears?

Feel the fear, but do it anyway

Fear will stay with you as long as you continue to grow. As long as you do new things and push your circle of comfort and competence you will feel fear. When you feel no fear, you are not growing. So we need to manage our fear, because it’s not going away.

The first thing to do is simply push through fear. Go ask that girl out. Stand up and say what you want to say. Take the trade you planned. After you make the decision, you will feel better  already because you demonstrated to yourself that there is really nothing to fear.

  • Sure, the girl may say “no”. So what?
  • Sure, your audience may not like your message. So what?
  • Sure, you may get stopped out. So what?

You’re still alive & well, and have gained experience.  If you give into fear, you give into helplessness. If you push through fear, you enter the realm of self-esteem and power.

Once you decide to face the fear, you make the commitment. Then you need a big WHY.

We always need motivation to push through a fear. What is the reason for pushing through this fear? For me, it boils down to a feeling I have in my stomach when I don’t push myself. I don’t want to regret anything. I want to live in line with my values and my ideas. I want to talk the talk and walk the walk and be an example for others to follow.

Useful Strategies

Start small, build momentum

One thing I did, was just start small.  In trading, it’s difficult to simply “Accept uncertainty” so what I initially did was simply risk minimal amounts until I no longer feared entering the market. By simply minimizing your risk and “doing it” what happens is that you generate some momentum, which then allows you to move faster and tackle larger fears.

Once I was able to risk pennies to make pennies, I started to risk Euros to make Euros, and then risk 10-20-30 Euros to make 30-60 Euros. And so on.  The fear of loss never went away. I could simply deal with larger risks as I pushed forward, almost without noticing it. But it takes time and perseverance. You can’t force these things. You just need to continue “doing” the right thing, and gradually your body will allow you to progress.

No-Lose Model

In the past I used to confront financial decision making like this:

  • There is a right choice and a wrong choice. Which one is which? The markets are uncertain.
  • My mind would drive me crazy with pro’s and con’s of each situation.
  • Anxiety crept up as I was effectively trying to predict the future.
  • I didn’t trust my gut instincts
  • I would seek advice from others or from some technical input.
  • I would feel the responsibility, which added to my anxiety.

That is how you cripple your mind and your body. Instead, here is what I do now:

  • There is no wrong choice. There is only the most logical and evident choice as of now.
  • I do my homework, and I follow sound practices. I don’t push the letter.
  • I have trained my instincts and I trust them.
  • I take total responsibility for my actions. This also means I take responsibility for the “mental chatter” I give myself. If I lose, I don’t pester myself. I had no logical way of knowing the outcome ahead of time. I did the right thing and followed the plan. The wrong thing would have been to plan, and not execute.
  • I remind myself that it’s not a life or death moment. So lighten up!

In my experience, many fears simply boil down to whether or not you believe in your own capacity to confront what life may throw at you. It’s about your self-esteem. Do you truly trust yourself? Have you learned to trust yourself? Have you ever stepped out of your circle of comfort? How did it go? You’re still here reading this article right?  Get out of your own way, and act in the face of fear.

About the Author

Justin Paolini is a Forex trader and member of the team at  www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.