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How To Overcome Fear After Heavy Losses

After significant losses, our trading psychology can get in the way of trading, even if we have improved our technical trading edge.

In a series of poorly planned trades, Sandy nearly blew out his trading account. Shaken, but not defeated, he suspended trading and spent time analyzing his mistakes. A few months later, he felt he understood what went awry. Moreover, he developed his trading edge and some new ideas with research and back-testing. He felt ready to trade again. But when he went to put on a trade, he was paralyzed with fear. He just couldn’t pull the trigger.

Like Sandy, a lot of traders experience large losses. Many stop trading and never return. Others work hard to understand and correct the flaws in their technical game only to find that none of the techniques they learned would help them overcome fear. To be successful, traders need to manage both the technical game and the emotional side of trading.

Significant trading losses often lead to emotional distress and turmoil. Unless addressed, the trader may re-experience those painful memories in future trades. Following anguishing losses, a trader may become paralyzed and unable to enter the trade or act in other fear-based ways. After all, traders are human and naturally fear that which causes pain. Although the desire to trade may be strong, the mental response to fear can be stronger. Anticipated pain is sidestepped by not pulling the trigger. This is not a sign of weakness. It is merely the mind’s attempt at self-protection, though it causes much frustration and distress.

Coming back from large losses is challenging, and most traders will face this challenge at one time or other in their career. Improving their technical edge is only half the battle. A successful comeback requires addressing the mental side as well. The following techniques may help the trader overcome fear:

  • Trade small. The immediate task is to recondition your mind to trading rather than to make money. If you go in with size, you work against yourself.
  • Monitor your thoughts. Sandy not only feared the pain of loss, but also had other unconstructive beliefs. He noted, “If I have another loss I’ll be a failure. I just can’t fail!” He magnified the importance of every trade and caused himself enormous pressure just by his thoughts.
  • Learn to handle difficult thoughts and feelings. Sandy had a successful comeback after learning to put each trade into proper perspective and learning how to handle fearful thoughts and emotions. He adopted the attitude that each trade is only one of many trades and it doesn’t really matter how it turns out; over the long term, he knew his edge would prevail. He also learned to trade with his doubts and fears treating his thoughts like people passing by on the sidewalk. He noticed them, but didn’t stop to talk to each one. He just let them naturally pass by and went about his business.
    Other useful measures include mindfulness, relaxation, and a mind-in-the-moment approach. Stubborn fears may be overcome with stress inoculation techniques in which you are trained to remain calm while rehearsing feared trading situations.

Traders who overcome fear after heavy losses often become quite successful. They work on their technical abilities as well as psychological skills and overcome fear.


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