Trading Psychology: Balancing Fear and Profits

In this article, we discuss a hot topic: the psychology of trading. Moreover, we address one of the most intense and important feelings for a trader: fear. Despite stereotypes - suggested by a collective imagination that in the vast majority of cases does not correspond to reality - fear is one of the most recurring feelings in those who carry out speculative investment activities, regardless of their level of experience and the successes they have achieved over time. Specifically, we will take stock of the relationship between fear and trading activities. We will also propose a solution to the problem, which (it is good to put your hands forward) is not at all simple to put into practice. Finally, we will invite you to reflect on your own psychological endurance, which is complicated to do but nevertheless necessary.

The relationship between fear and trading

Fear is one of the primordial emotions, not only of human beings but of all animals. Fear is necessary, it is a resource that evolution has allowed us to preserve, in a perspective of self-preservation and survival. Fear, obviously, emerges in the presence of danger. Instinct, when fear comes into play, suggests that the individual should flee or, on the contrary, attack the very source of the danger. In this specific case, that is, when it comes to trading, what does the danger consist of? It is a question that is simple to answer: those who practice speculative investment activities are always subject to the risk of losing money, regardless of market conditions and their wealth of skills. Now, it is impossible to "attack" the source of the danger when practicing trading. Therefore, there is nothing left but to flee. It is not surprising that the most frequent consequence of the onset of fear is exiting the market and, a little more rarely, complete "paralysis". The trader simply stops operating. If this submissive and defeatist attitude in some cases actually saves the individual, on the other hand it creates a loss of money, and often produces devastating side effects. A stationary trader is a trader who earns nothing, and misses out on the profit opportunities that - even in a context fraught with obstacles - emerge with a certain frequency. Thus, fear transforms from a resource to an obstacle, according to the classic logic of the double-edged sword. Another problem with fear is that, like other emotions (positive and negative) that emerge during trading activity, it is actually not removable. We mentioned it at the beginning: fear is an emotion that characterizes all traders, experts and less experienced, rich and poor, competent and mediocre. The only solution is to limit the effects of fear, at least the negative ones, to somehow manage it. This indication is valid not only for trading but also for everyday life (both private and professional).

How to trade despite fear

So, how to manage fear? This is a question that all traders should ask themselves. Also because, sooner or later, the dynamics of things require the individual to deal with this unpleasant but intense feeling. Managing fear, making sure that it does not impact one's way of acting, means forcing one's nature, silencing one's instincts. An apparently impossible undertaking. Yet, there is a resource that, at least potentially, allows you to do so. A resource that equips the individual with a sort of parachute, which acts as a real protection but also as a calming element. This resource consists of risk management, or risk management. It is not a practice like any other, but a set of techniques whose purpose is really to control risk, to inform with a sufficiently low margin of error about the consequences of traders. In this way, the trader can modulate the order based on the risk that, in a totally objective way, he deems he can bear. Risk management is always associated with Money management. That is, the discipline that, on the basis of the evidence drawn from risk management, allows you to control losses and to establish a priori the maximum bearable loss. Risk management, or Risk Management as you prefer, plays precisely the role of a parachute. On the one hand, it allows you to frame the danger within a system, bringing it as much as possible under the control of the trader; on the other hand, its presence reassures the individual, who draws mental and emotional resources to minimize the impact of fear.

The main problem of risk management

Obviously, the issue of risk management is not all roses. On the contrary: risk management also poses significant difficulties. The reason is simple: in order for this discipline to be able not only to protect against dangers or reduce their impact, but also not to hinder the path to profit, it should always be found outside the comfort zone. As a result, the trader, even in the presence of a solid Risk Management system, operates with a certain discomfort. In essence, the fear of losing capital never leaves him. Although, it is good to reiterate, it is downsized, precisely because the danger itself is downsized. Leaving the comfort zone is always uncomfortable, this applies to all areas of life. Yet there is no success without abandoning, temporarily or permanently, the comfort zone. In trading this is emblematic, but also in professional and private life the rule of "Nothing ventured, nothing gained" applies. A proverb of clear popular origin, but which has analogues in almost all languages. A sign, this, which suggests an incontrovertible truth of human dynamics.

A solution to the problem

From all this discourse a bitter observation follows: the application of Risk Management techniques is fundamental, but it may not be enough. The trader would still find himself in a condition dominated by fear, without the possibility of really effectively reducing its effects. Let's be clear, traders who operate with a Risk Management system are always more "relaxed" than completely uncovered traders. However, they may not be relaxed enough. It is therefore necessary to integrate everything with another kind of approach, with an exclusively psychological approach. It consists of a process of personal change, of autogenic training, aimed primarily at developing specific skills. Above all, the ability to resist (at least a little) impulses. It is not a question of denying the existence of fear or pretending that it does not exist, also because it is impossible. It is a matter of implementing the ability not to obey fear itself, to resist the impulse to act according to instinct. This renunciation appears possible also thanks to the presence of a solid risk management system, which not surprisingly suggests what to do and how to behave. In this way, the trader always has a ready and rational alternative to the actions that, on the other hand, he would take under the impulse of fear.

A question to ask yourself: am I cut out for trading?

Risk management and autogenic training are not disciplines for the faint of heart. In any case, it is necessary to have a certain predisposition to personal change and analysis (of the context and one's emotional condition). Normally, the human being is resilient enough to be able to travel both tracks at the same time. A minority, however, is held back if not literally impeded by specific personality defects. These individuals are probably destined to remain at the starting point, unable to develop the skills necessary to manage fear. Here, the doors of trading are precluded to them. Before deciding to enter the world of speculative investment, therefore, check that you do not belong to this psychological type.