Thursday, April 23, 2015

Training Fear

Fear is rooted in one primary source. Your bank account! When we decide to engage in speculation in the financial markets, we are also deciding to risk funds that, for most of us, have been acquired through investment of time, energy, knowledge and experience in

some other area of expertise that we posses. The decision is primarily based on the potential for an increase in personal capital for what appears to require less “effort” than our other alternatives. Aspiring traders typically don’t spend the required amount of thought and time to understand the risk involved in what they are about to endeavor.
Incidentally, the risks become apparent the moment a trade is placed and becomes live in the market as the equity value of hard earned funds begins to change in a manner that is effectively out of our control.
Because fear is rooted in our equity, would it make sense to weigh the risks of our decisions and place an amount of equity into a trade that is somewhat inconsequential in value? Sure it makes sense! However, the desire to increase our capital overrides our ability to rationalize the larger picture, which feels fine at the time, but has a strong potential to inflict pain as a result of losing funds due to an oversight of what is real.
As we discussed, the first call to reduce or eliminate fear from our trading is to trade within reasonable equity management guidelines. Once fear is reduced or eliminated from our psyche, we can then begin proper execution of our trades, because the consequences of our equity value will have a small affect on our overall financial picture.
As traders, we know that the market moves up and down. We have all seen hundreds and thousands of price charts containing a multitude of shapes for candlesticks and bars. When the market begins to rally, as we knew it would, there is an impulse to buy right at the top of a bold faced upward growing candlestick with no wick above, as price makes a new high for the period. Most traders have no fear about buying into such a short term impulse, since it is in agreement with their analysis, only to watch price fall back towards, or directly to, their protective stop loss, which is when the fear begins to set in. After time has passed, the fear of being stopped out when the market is doing what it has always done, moving up and down, as we knew it would, should not be a surprise. As odd as it seems, this scenario was not a consideration at the time the market appeared to be getting away from us and leaving our account empty while others were being satisfied. “After all,” you say to yourself, “I knew it was going to go up, so I should get paid, too!”

The concept of buying dips and selling rallies is not just some concept found in every book ever written on trading. It is a concept that must be exercised with discipline. The inherent challenge of most traders is to understand that buying into price action that is falling away from the desired direction is in opposition to what the human mind understands about what the market should do in order to get paid, which is for price to go up.
For some reason, when a decision has been made to “buy,” but price action is moving against the desired direction, traders have a tendency to forget about the lengthy analysis, chart patterns and fundamental information that has strongly supported the decision to

buy in the first place. As a result, fear immediately steps forward and tells you that you would be crazy to buy now, because price is moving down and you want it to go up!
In such a scenario, fear has produced a profound psychological impairment that has almost completely inhibited the traders’ ability to rationalize. The fact is, buying should always be done while price action is moving in opposition to the direction of the desired position. Effectively, you are trading when you are most fearful. Your mind should be clear concerning the evaluation that has been made, which inspired the decision in the fist place. Always attempt to trade during a period, or movement, when price action is moving against the direction you want the market to go for you to get paid.
When trading FX for example, this could occur within minutes of price confirming your decision, or it may happen hours or days afterward. Simply identify your levels where you trust the market would touch before taking on a move that will pay. Rather than chase the market up buying on a boldfaced candlestick, buy into a boldfaced bearish candlestick. Most often, this will put you on the positive side of the dealing spread very shortly after making the trade. If the level you selected as support holds and you traded as close to that level as possible, then you will have very little drawdown on the trade and it will pay sooner. In addition, the entry will be closer to the stop level and the first profit target can be closer.
To become successful at good order executions as described above, traders must train themselves to trust in their analysis and train their psyche to become comfortable with a market characteristic that previously induced considerable fear and impairment of mental clarity and rationale.
All this goes with saying, that fear is ultimately rooted in loss of money. Fear for loss of money for which one is unwilling to calculate the consequences and risks involved in the discipline. Coming to terms with the risks and applying proper equity management will
open the door to becoming comfortable with trusting your tools and buying when price action is moving against the direction the trader believes the market should go in accordance with your analysis.

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