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Overcoming the Fear of Loss in Trading

The fear of “pulling the trigger” stems mainly from the fear of loss. That same fear is responsible for 3 major actions or inactions that destroy traders:

  1. Cutting winners short. You take what you can and fear that if you don’t grab whatever small gains you have now, they would disappear.
  2. Keeping losers. You don’t dare to actualize your losses and hope that the trade will turn around.
  3. Unable to take every valid trade setup. You don’t dare to pull the trigger because you have associated the intense negative emotions of losing or the possibility of losing with being in a trade, so you escape from experiencing those feelings by not entering into a trade.

Psychology was never an issue when I was swing trading stocks, but has now become a major stumbling block when I am trading intraday futures. Hence I have just started to look into this.

All three psychologists mentioned the need to trade small. Other advice include doing visualization exercises, mindfulness exercises, and looking at the bigger picture.

I also found two resources with mindfulness training and a related webinar, links below.

Dr Brett Steenbarger

  • If it is due to lack of confidence in the system, back test and/or paper trade the system.
  • If it is due to fear of loss (Steenbarger calls it performance anxiety), do visualization exercises where you picture yourself in the stressful situation but doing the right thing and keeping yourself in the right frame of mind. Also paper trade and trade small. (more…)

Benefits of Mindfulness in Trading

Mindfulness in trading can be of significant benefit to traders.  Mindful trading will positively impact traders and their trading in a number of ways:

  • Reduce loss aversion
  • Mitigate the disposition effect (i.e., cutting winning trades short and letting losing trades run)
  • Help traders get into “the zone”
  • Reduce the negative effects of cognitive biases and heuristics on trading decisions
  • Directly reduce stress
  • Help traders see the market more clearly
  • Increase awareness of the trader’s internal state and how it impacts their trading
  • Increased ability to maintain focus on the market and the trading task at hand while trading, even when emotions are running hot
  • Increase internal emotional regulation
  • Other positive effects on trading and trading behavior

The Development of Mindfulness Skills Helps the Trader

  • Reduce stress
  • Tame the fear response
  • Counter the strong tendency toward loss aversion
  • Strengthen decision making
  • Strengthen internal emotional regulation
  • Improve and develop emotional intelligence
  • Reduce the dominance of intuitive decision making and cognitive error
  • Increase deliberative attention
  • Better see the market and its trading opportunities
  • Stay on task
  • Overcome the negative‐reinforcing properties of ineffective trading
  • Enhance overall psychological well‐being.
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