Don’t Let Fear Overpower Your Trading

When we think “risk,” we instinctively think “fear.”  That’s because we value survival. Fear is our natural radar. It’s served us humans for hundreds of thousands of years.

Although digital trading is a relatively new thing, the same instincts apply. To trade is to willingly engage risk for potential profit. Without fear in the markets, you might not last very long. It’s nearly impossible to learn from your mistakes if you have no fear of risk or loss.

But there’s a point when the fear can become too intense; where it prevents you from pursuing reasonable opportunities (not just in trading but in life). Some of us find fear debilitating. But if you feel that certain opportunities might be worthwhile, then you’ll likely want to find ways to manage your fears in order to take calculated risks.

How Fear Manifests Itself In Trading

Calling out and naming your fears is the first step to dealing with them. Here are the five most common fears experienced in trading.

  1. Fear of losing money
  2. Fear that your trading methodology isn’t sound
  3. Fear of making bad trading decisions
  4. Fear of missing out (aka, FOMO)
  5. Fear of a good position turning against you

It takes time and experience to deal with each type of fear. Following a few sound principles can help, so let’s go over them to see how they might help you counter the common fears we listed.

Remember, fear is not a bad thing; in fact, it can help you avoid disastrous outcomes. But too much of it can work against you, perhaps leading you to you take a bad trade or stay on the sidelines and miss an opportunity.

Below are several solutions that can be helpful for managing your fears related to trading.

Manage Your Position Size

You probably noticed that the intensity of your trading fears correlates with your position size. Take on too large a position, your fears go through the roof; minimize it, and you feel some relief.

Here’s the trick: find market opportunities that offer far greater potential upside than downside. Think 2-to-1 or greater reward to risk. Next, limit your potential loss to a percentage that’s manageable for you. This way, you’re not freaking out over your potential loss. You’re also exposing yourself to greater upside potential.

How much you decide to risk is up to you. Much of it depends on your trading frequency. The more you trade, the greater your chances of hitting a losing streak. Set your percentage risk limit based on the probable scenario of a losing streak. This way, when it does happen, you’re neither blowing up your account nor putting yourself through a massive panic attack.

Set Negative Performance Limits and Monitor Your Stats

You may be trying out a new trading methodology that flaunts eye popping performance stats.  You’re skeptical because such stats seem a dime a dozen; yet, the logic of the method seems sound, and you want to give it a shot.

Pay attention to two figures: the average drawdown and the worst historical drawdown. If your losses exceed the average drawdown, then consider that a warning sign. If it exceeds the worst historical drawdown, which can always happen, then that’s when you have to decide whether the method’s negative performance is an anomaly or if the method’s no longer valid.

Although this principle directly addresses the fear of a method’s lack of soundness as well as that of a position going bad, it can also help manage your fear of losing money if you trade small positions. The fear of making bad decisions is a non-issue because you’re following a strict method and the individual trade decisions are out of your hands.

Pre-Plan Your Trade and Contingency Scenarios

Imagine the following inner dialogue:

“I can see the setup. I expect the price to move from A to B. If it does, I’ll make this much. If it doesn’t I’ll have to exit at C. If that happens, I’ll likely lose this much. My profit potential is greater than my loss potential, and if the trade does lose, I’ll still have enough capital to trade x number of times before reducing my trading size.”

This is what happens when you pre-plan your trade and contingency scenario. You know what to expect, win or lose. Your upside return potential is greater than your downside risks. This one principle can significantly help you manage most of the trading fears listed above.  Remove one step from this process and you amplify your risks, opening the door to a feedback loop of fears and uncertainties.

A Few Dishonorable Mentions

Here are a few common trading psychology principles that can harm you more than help you.

  • Stick to your system: If your system isn’t performing, take a look at the average drawdown as well as the max drawdown.  If you don’t like what you are seeing, then it is may be time to cut your losses and stop the system.
  • Optimism: How you feel on a personal basis can significantly affect your trading performance. That being said, both optimists and pessimists get shattered in the live market. Instead, stay calculated and always set your trades up so that your upside is potentially higher than your downside.
  • There is no Holy Grail:  It’s not a “thing,” nor is it a “skill.” If you trade in a way that works with your intrinsic inclinations and tendencies, then maybe you’ll find the closest thing to the best trading method for you.

The Takeaway

Fear is a common emotion in almost every endeavor involving some degree of risk. Manage it, or step away. There isn’t much of a choice. We gave you a few tips to help you deal with your trading fears. Remember, fear can be your friend. Pay attention to it; listen to it. Just don’t let it color how you see everything around you. In other words, don’t let it define who you are as a trader. Good luck.


Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations.  There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.