I N N E R W O R T H

NQoos ;-)

TRADING NAKED

Master your setup. Master your Self

the interpretation and application of price action concepts

We all share a similar path in Trading. Even though you may not be a consistently profitable trader now, you can chose to enjoy the path. This alone may make the difference in your success.

Mind Over Markets ^TM - February 4, 2005

The awareness of our own strength makes us modest.
	- - Paul Cezanne - ;

Feature Article

The Anatomy of Fear

Market action is often driven by fear and greed. Dreams of wealth can drive almost anyone to take unnecessary risks, but the fear of losing is powerful. Fear is an instinctual feeling. As humans evolved, they learned that unless they protected themselves and their resources, they wouldn't survive long. On the psychological side of things, when we perceive fear, we react quickly and get ready to either stand up and fight, or run away to save ourselves. These same emotions play out in trading, and it's worth understanding the psychological anatomy of fear. What psychological factors drive our fears and how can we control our fears? The more you can understand and handle your fear, the more you'll be able to control it during critical moments of trading where it is more useful to stay calm and relaxed.

We are fearful when we sense impending doom. A common event that produces fear is putting on a trade that seems at first glance to be a sure loser. It is easy to panic and react impulsively, but you may have other options. Gaining a more in-depth understanding of fear may help you control it. In a classic study on emotions Dr. Craig Smith asked people to describe events where they were extremely afraid. For example, fear-provoking events included being mugged, losing control while driving in a snowstorm, or getting lost in the mountains. As might be expected, people didn't find fear to be a very pleasant emotion, but people differed on the extent to which they tried to shut it out and ignore their fear. When people are fearful, they aren't sure what will happen next. They believe that their doom is inescapable, and that they can't possibly gain control of the situation. These research findings have a direct bearing on why you may feel afraid while trading. There are many times when you make a losing trade and feel that you just can't get out of it. The loss is inevitable and you can't control the outcome. It's hard to know what to do. You don't want to feel the pain of taking a trading loss, but no other alternatives seem viable.

It is useful to remember, however, that events don't make you afraid. It is the interpretation of those events that make you afraid, your mental representation. You are scared because you mentally believe that you are about to get hurt, there is no way out, and that there is nothing you can do. If you were to think instead, "I'm not going to get hurt, I have several alternatives I can pursue, and there is a lot I can do to get out of this," you wouldn't feel fearful at all. Fear is a useful emotion. It protects us. Indeed, if you are in the midst of a losing trade, and all would objectively agree that you can't possibly win and that there is no way out, then there is no use feeling afraid any longer than necessary. If you can't win, then you might as well close out the position and take the loss. But there are those times when we jump to conclusions prematurely and close out a trade at the first sign of a loss. Instead of acting impulsively, it is useful to make a careful analysis of your situation and make a prudent decision. You may not want to mull over a lost cause, but it's useful to remind yourself that you are fearful because you believe harm is inevitable and that you have no viable alternatives. For a brief moment, you may want to think, "Maybe I can get out of this. Perhaps I do have alternatives. Maybe I can think of a plan to get me out of this." Using such a thinking strategy will give you a little time to think about whether you indeed have viable alternatives. For example, you may decide upon careful deliberation that the masses have reacted to some disappointing news unnecessarily and sold too early, forcing a stock price down. It's quite possible that the fundamentals of the company suggest that the price will recover upon a future earnings report. Waiting it out may make sense, but if you react quickly before considering all possible alternatives, you may end up selling a position that could have turned out to be a winner. Considering viable alternatives isn't the same thing as false hope. If you know that there is no way the trade will turn around, then by all means, close the position and take the loss. But if there is a way out, it is useful to control your fear and consider your options. So remember, your thinking patterns dictate your feelings. If you feel your demise is sealed, you'll panic and may act impulsively. But if you calm down, and consider that you may have more options that you initially thought, and that you can realistically avert a grim outcome, you can control your fear and save the day.