Profitable ETF Trading Strategies: living with normal fears
In other articles I have considered the usefulness of selecting metaphors to help you place your trading plan in context. Metaphors are powerful devices for focusing your mind in helping provide context for complex behavior in situations where consistency and forceful action are often the critical components of success.
In this article I want to examine the usefulness of the metaphor of trading as combat to see what kinds of insights we can discover. I think you will find that it is a very useful metaphor provided you do not carry it too far.
Some of the most powerful aspects of combat are: fear, surprise, uncertainty, violence, consequences of failure, coordination, stress, leadership and emotional fatigue. Each of these aspects can easily be found inside the trading arena. I want to look more closely at fear in this article, because it is so powerful and pervasive.
Fear: it will freeze you in place when it’s time to act or it can prompt you to act when you shouldn’t. You will cloud your judgment so that you go left when you should have gone right and will cause you to question your own best judgment. Even the best laid plans, founded on the soundest principles of deliberate planning, may unravel when an unhealthy dose of fear is applied.
Facing fear, either directly or indirectly, is the first step in mastering this powerful emotion. The best way that I know to manage fear as a trader is to reduce your position size until you can trade at a level that allows you to operate with nervous energy but not outright fear.
No matter how effective and experienced you are, I think fear is an element of our trading all-time and one that we should therefore acknowledge and respect. It helps keep us humble and focused on our risk management.
Another useful technique for managing fear is to name it. By moving in the direction of the feeling of fear and putting a face and a name on it, you give yourself a handle with which to manage it delivered late.
By starting with the smaller aspects of the source of fear and learning to manage it carefully, you will soon desensitize yourself to its paralyzing aspects.
You will no longer feel the panic reaction when the environmental cues trigger the feeling because you will have the confidence to know that you can manage it.
Your effective risk management strategies will ensure that you don’t trade too large or too often. Your risk management will keep you from exploding and this can reduce an important source of your fears.
Trading with relaxed money, which is another way to say of being well capitalized and staying within your risk profile should also help reduce the source of some of your fears.
Finally, learning how to manage conditions of uncertainty will take away some of the nervousness associated with uncertainty.
Learning to recognize, acknowledge. manage and co-exist with fear will help you move beyond it to your next trading challenge.