How does fear of loss affect your trading? You know, that "red" on your screen as a trade progresses?
If you are the type who tends to focus on the potential winnings, then great. But if you are the type that stares anxiously at the "losing" red number, willing and praying for the "suspended" sign to appear for a goal, then you are at least partly being controlled by fear of loss. This will have a harmful affect on your mental well being as the stress can impact on your decision-making.
Economists have found that loss aversion is a major factor in financial decision-making. Most people prefer to avoid losing money than acquire more and the psychological impact of losing is considered to be twice as powerful as the pleasure of gaining.
So, how can you overcome it, recondition yourself and trade without fear or at least reduce it?
Firstly, you shouldn’t be too hard on yourself. Fearing loss is a normal human reaction – no one likes losing and we naturally make moves to avoid it. However, decisions based on avoidance are detrimental to successful trading. It’s not easy to undo behaviour patterns and reactions that have been firmly established over a lifetime. Though one way is to adopt a cognitive approach which is a practical form of psychoanalysis.
When something happens in a game, we will form an opinion which leads us to having an emotional response. It is important to realise that if the trade goes against us, it is not the event but our attitude to it that can cause us to suffer. You cannot control what happens during a game, or any external aspect, but you can control your reactions to the event.
The only real way to change negative thinking is to face your fear in a real life situation and learn detachment from failures and events not going your way. This means that paper trading can’t really do that for you. Although paper trading is a vital stepping-stone in learning a theoretical method, it doesn’t expose you to the real experience of risking hard cash. And exposure to the actual fear is key.
When the eminent cognitive therapist, Albert Ellis, was 19 he decided to test out a behaviourist theory that you could desensitise yourself to the things you feared. He admitted to being terrified of speaking to girls. So instead of avoiding the fear, he went to the Bronx Gardens and if a girl were sitting on a bench alone, he’d sit next to her and give himself one minute to speak to her. He tried talking to 130 girls, 30 walked off right away, but a 100 spoke to him. He got one date (who stood him up) but he managed to overcome his fear.
From his real experiences, he learned detachment. He was simply applying a rinse and repeat method that can be applied to football trading or betting. Once achieved, your emotions will be less dominated by fear of loss.
How long does it take to get to this detachment? Well, it is relative to how entrenched your fear is in the first place, how committed you are and how frequently you expose yourself to trades, but the optimistic thought is that it can be done.
Goal Profits member: Sal