There are many causes of this anxiety which many times leave a new trader with too much fear to really trade. Fear sends them out of the markets to go join the 90% that did not make it. This fear can arise from past losses that were so big and traumatizing that a trader can’t bear the potential of repeating a mistake like that with all the emotions tied to the previous failure. A new trader can even get a valid entry signal but focus on the real money in the trade and the potential for loss and lose sight of the potential for gain.
A trader that is afraid to lose can’t trade because even the best traders spend a good part of their time being wrong and cutting losses. The good losses in trading are either tuition in your early years or the cost of doing business inside a robust system in your later years. The bad losses are big and are usually the result of the new trader not doing adequate homework so the markets take that new trader to school. These big losses not only hurt the new trader financially but can be traumatizing mentally and emotionally causing a loss of faith in themselves and their system.
More than anything trading is a mental game and if your thoughts are not right then none of this will work. If you have your mindset right about trading then nothing can stop you. A trader must have the ability to point at the target and pull the trigger in the moment when it is time. We must accept the risk and reach for the reward. Here are five tips to make that a possibility.
1. A trader can only build confidence to take a real time trade entry after they have done the necessary homework in back testing through multiple market environments to know the probabilities of success and the possibilities of failure. Understanding how the markets have behaved with past price patterns can give the trader the boldness they need to push the submit button on their broker’s screen.
2. Understanding the price level where your stop loss on a trade will be and also your potential price target will give you a good idea of the risk and reward dynamics of a trade set up. It is easier to trade when you know that you are risking $100 for a chance to make $300 and the odds are on your side with a great entry.
3. Structuring your position sizing so that if your stop is hit you will only lose 1% of your total trading capital will eliminate much of your fear of failure. The urgency and importance of any one trade should be converted into the calm assurance of knowing that the current trade is just one of the next one hundred trades. You can overcome the majority of anxiety around trading when you simply trade small enough so that any one trade or a string of trades will not affect your long term trading success.
4. Trading what you know and are familiar with is low stress trading. Trading a chart pattern, stock, or index that you have traded for years is familiar territory. Also trading markets inside your circle of competence creates confidence. Only trade futures, options, stocks, bonds, forex, and indexes that you understand. Many traders drown chasing unfamiliar waterfalls.
5. A lot of performance confidence comes from having a detailed trading plan on what you will do before the market opens and the faith in yourself to execute that plan after the market opens. Knowing that your decisions will be based on the facts and the reality of price action and that you will not be swept away with emotions and ego while trading can allow you to rise above anxiety and instead operate with faith in yourself and your system.