Understanding the Trader’s Fear of Risk, Fear of Loss
Fear has the power to become your greatest trading liability if it is not understood. Most people are afraid of risk, not only because they are afraid of failure but more so because they are afraid of loss. Let’s look at what research tells us are the reasons that most traders fail. Successful traders agree that these are the things to justly be feared.
The high rate of failure for beginner forex traders (as well as all other securities, stocks etc.) has been found to be directly due to these six things, in order of significance:
Poor understanding and knowledge Undercapitalization Unrealistic expectations Lack of patience Lack of discipline High risk aversion
As we look over this list, it becomes apparent that fear of failure and loss is the by-product of trading without having in place a proper Forex Trading System – one that includes a high element of mind training and a high quality forex education. The last one on the list, high risk aversion, however, is not pointing not merely to a dysfunctional Trading System, it is talking about the need to understand risk in order to succeed...
Clearly if the fear of loss is coming up for you because you are trading money that you cannot afford to lose, this type of fear is a healthy and sane response. If this is the case then forex trading is not the place for you. The Forex Market is considered a High Risk market. Every responsible forex training and trading site makes that same high risk disclaimer in no uncertain terms. That is why stringent risk management should be factored in every single trade you ever enter. However, it has often been said by successful traders that the Forex Market is one of the risk-management safe trading markets for many reasons, which are covered in the beginning chapters on ‘The Advantages of the Forex Market’.
How Successful Traders Manage Fear of Risk and Loss
The answer to the underlying question of fear can be seen in the differing conditioned behaviors, regarding fear of risk and fear of loss, between unsuccessful and successful traders.
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Phone: 520 877-3831 www.forex-advisor.com
In referring back to ‘seeking what every successful trader has in common’, I am reminded of Charles Sanford, former Chairman of Bankers Trust, who gave the very insightful speech on how the successful view the fear of risk, excerpts of which I have loosely recalled here. I include this because it also serves as such a good example of ‘reframing’ a conditioned belief, and the benefits of proper mind training.
From an early age, we are all conditioned by our families, our schools, and virtually every other shaping force in our society to avoid risk.
My first observation is that successful people understand that risk, properly conceived, is often highly productive rather than something to avoid. They appreciate that risk is an advantage to be used rather than something to be avoided. Such people understand that taking calculated risks is quite different from being rash. The paradox is that playing it safe is dangerous. Far more often than you would realize, the real risk in life turns out to be the refusal to take a risk. In other words, the truly most threatening dangers usually arise when you shrink from confronting what only appear to be the most threatening dangers. What is widely regarded as playing it safe turns out not to be safe at all. As Heraclitus, the Greek Philosopher said, some 2,500 years ago: Nothing endures but change. Most of us have come to agree with this, but its consequences still deserve some reflection. Obviously, if change is the fundamental rule of life, then resistance is folly -- doomed to defeat.
In other words, in a world of constant change, a world where Heraclitus said you can never step into the same river twice, taking risks is accepting the flow of change and aligning ourselves with it. Remember the paradox: Risk only looks and feels like endangerment. For those who understand reality, risk is actually the safest way to cope.
To take a risk is indeed to step into circumstances you cannot absolutely control. There, again, is the paradox: In a world of constant change, risk is actually a form of safety, because it accepts that world for what it is. Conventional safety is where the danger really lies, because it denies and resists the world. I trust you understand that when I say risk is actually safety, I'm talking about a certain sort of risk. I'm not advising that you leap off tall buildings in the hope that the operation of constant change will reverse the law of gravity in mid-flight. I'm speaking rather of a sort of risk that actually aligns you with the direction of change and that the task then becomes learning how to take risks properly.
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To be more specific, I believe firmly that the sort of risks that put one in a position to control one's lot in a world of incessant change are the risks that attempt to add something of value to that world. To create value, to focus one's efforts on increasing the fund of that which is worthwhile, involves risk. And yet, paradoxically, it provides you with the greatest control over a changing world and maximizes your chances to achieve a truly meaningful personal satisfaction.
This is a good opportunity to add a piece of ancient wisdom: Do not merely seek to follow in the footsteps of the successful. Seek what they sought.
The Characteristics of a Successful Trader
If we reframe the liabilities listed in trader failure list, we can clearly see that the Characteristics of a Successful Trader are:
• Excellent trading knowledge and understanding
• Adequate capitalization
• Realistic expectations
• Patience
• Discipline
• Understanding and Managing Risk
If you look at the advice from the world’s most successful traders today, you’ll notice that they will all agree with this, each in their own way.
Define first the level of risk you dare assume. Start with a small position, and then build it up if it works. -- George Soros, Currency Trader, Quantum Group of Funds.
All it takes to become a successful forex trader is aptitude, training, and experience. – Rick Smith, Forex Market Trader, Forex-Advisor.com
Spend your day making yourself happy and relaxed. Key is to play great defense, not great offense. Decrease trading size when you are doing poorly, increase when you are trading well. Place mental stops, price stops and time stops. Monitor your trading success in real-time. Do not be dwelling on mistakes made 3 seconds ago, but what you are going to do from the next moment on. Don't be a hero. Don't have an ego. Always learn, and question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead. ---- Paul Tudor Jones, Future’s Trader, Tudor Futures Fund
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The first rule of trading is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand. A trader has to be patient and willing to make mistakes regularly. -- Bruce Kovner, Caxton Corporation GAMut Fund
When you earn the right to be aggressive, you should be aggressive. (A philosophy reinforced by Soros) The way to build long-term returns is through preservation of capital and home runs. -- Stanley Druckenmiller, Currency Trader, Quantum Fund
A Trader’s Advice from 1923
After reading quotes from today’s traders, it is even more illuminating to quote here a page from another successful trader in a very different time and place, whose advice is remarkably the same. This list of Characteristics of a Successful Trader is quoted from Edwin Lefevre’s 1923 book, Reminiscences of a Stock Operator. It is even more poignant to remember that he wrote this book in the years before the 1929 Stock Market Crash, a time in America when it had become almost a craze to play the market.
Why so poignant? Because 80 years later his advice offers the perfect antidote to the pitfalls Behavioral Finance Scientists have found in today’s burgeoning era of online trading. And as for forex traders today, his voice speaks to us across time to a modern age when online traders are now flocking to the Forex Market in droves – the most rapidly growing market in the world, in fact in the history of the world.
Of course, it is also worth noting that every point he advises is a description of a mental trading tool achieved by mind training.
1. Caution. Excitement (and fear of missing an opportunity) often persuades us to enter the market before it is safe to do so. After a down-trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing.
2. Patience. Wait for the right market conditions before trading. There are times when it is wise to stay out of the market and observe from the sidelines.
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3. Conviction. Have the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don't let fear of losing part of your profit cloud your judgment. There is a good chance that the trend will resume its upward climb.
4. Detachment. Concentrate on the technical aspects rather than on the money. If your trades are technically correct, the profits will follow. Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen-watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses.
5. Focus Focus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends.
6. Expect the unexpected. Investing involves dealing with probabilities – not certainties. No one can predict the market correctly every time. Avoid gamblers’ logic.
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