There is a phenomenon that almost every trader struggles with at some point in their career. For some, it even happens before they ever get started. For me, it was most prominent in my career when I was making the switch to FX from trading stocks and options.
And that is the ever-present, but occasionally more prominent fear of failure.
Fear can stupefy traders into in-action; allowing their trading accounts to sit idly while their dreams dissipate into the realities of indecision. Fear can affect us individually, and it can become a pervasive theme throughout markets, wreaking havoc across the globe; 2008 is evidence how poisonous this emotion can become.
In this article, I’m going to share with you some of the best advice that I’ve ever received on the topic of fear; a short, sweet axiom that I can utter to myself whenever I have a question about whether or not I should take that trade that instantly dissolves any fear that I may have.
Before we get to the quote, there is an important question that every trader needs to have the answer to at all points throughout their trading day. The answer to this question will add perspective to our fear; it will show us how insignificant this emotion can be and even more importantly – it will encourage us to battle through difficulties to get to the promise land. And that question is:
Why do you trade?There isn’t one right answer to this question… The answer can be different for all of us.
Some of us just want to make a little extra money so that we can spend more time with our families, while others have plans and hopes for full-on global financial domination. The answer to this question is your driver. This is what can make the tough times easy.
Whatever the answer is, it needs to be important to you.
This is your goal. This should be posted on the top line of your trading plan as a reminder of what you hope to get out of all your hard work. It’s of vital importance to keep this in mind, because when we are trading, there is a litany of factors to stay on top of. Our primary objective can easily become obscured, which can lead to paralysis by analysis.
One Trade Won’t Make Your Career, but It Sure Can Break itThis is how the conversation came about with my friend in which I ultimately found the error of my ways. The friend, also a former stock trader, had moved into the FX market earlier than I had. He had adapted his game before FX was the prominent asset class it is today. He has since ‘retired’ and now spends his days on the sunny shores of San Diego or Hawaii, wherever his mood takes him. He still trades FX, but primarily for fun as he doesn’t really need to earn another dollar for the rest of his life.
Coming from stocks and options, I was a ‘patient’ trader. I would find a stock I liked and a reason I liked it (usually a fundamental story of some kind such as a biotech company with a product up for FDA approval), and I would then watch the technicals to find a comfortable way to play it. The inclusion of options, essentially, gave me the opportunity to ‘leverage’ my ideas. Trading in gaps was a near necessity if I wanted to catch the bigger moves, and because of this I comfortably developed myself as a swing-trader.
The FX Market can be intimidatingEven after trading in stocks for over nine years at the time I had moved up to FX, the speed of the Forex market was impressive. The fact that the market never closes was only partly as interesting to me as the amount of liquidity behind each of the major currency pairs. The availability of 400 times leverage (which has since been lowered to a maximum of 50 times leverage per Dodd-Frank in the United States), made these moves seem even more threatening.
Just as I had done with stocks, I was patient. I waited. I looked for an opportunity, a theme with which I could look to begin to build a position.
And when I finally found that theme, my first entry hit its stop.
I attempted to re-enter, thinking that my analysis was strong, and I now had an opportunity to enter at a better price. That got stopped out as well.
I worked through this uncomfortable, awkward period of trading a stock-traders strategy in a Forex traders market, and didn’t see results resembling anything close to what I had put up trading stocks. For the first time in a long time, I was looking at a negative profit line and I began to question whether I really wanted to adapt to the FX market, or whether I wanted to go back to trading stocks and options.
A trader’s psychology is of the upmost importance, I knew that then as I know it now, and I realized that I was starting to dig myself into the pit of despair that traders will occasionally find themselves languishing within.
So, I talked to my friend. And he started the conversation by asking me the very same question that I began this article with: “Why do you trade?”
I gave him my answer, and he then asked me –
“Do you honestly think you are going to achieve all of that with one trade?”
To which I replied, ‘well, no but….’ At which point he promptly cut me off.
He then went on ‘a lot of people like to trade because of the feeling of being right [which was not the reason I had provided him.] It’s not all that different than the reason people will sit in front of a slot machine throwing away their children’s inheritance one quarter at a time. They know that the odds are against them, they just want to feel that emotion of winning. It's an easy trap for human beings, who innately desire to be right, to fall into.’
He continued: “with your goal, you are going to need a heck of a lot more than one trade, aren’t you?”
I looked at him like the wizard that he had just become to me, and nodded in agreement.
He went on to say, “while you may need a lot more than one trade to get what you want, any one of those trades can easily drain your account, and end your game pretty quickly. So James, the answer is simple: You need to learn to be wrong more often because any trade you take is going to be but one of a thousand insignificant little trades in your career.”
One of a thousand insignificant, little tradesThat line hit me like a freight train carrying a ton of bricks. It showed me where my perspective had become skewed when moving from trading stocks to FX; the fact that all of this additional leverage I now had at my disposal was not necessarily something that I had to use. It merely gave me more flexibility, which – like freedom, is best in abundance so that we can choose how or how not to impact our own fate.
More importantly that that – this phrase puts into perspective the fact that any one trading idea you have is, at its very best, a hypothesis. Nobody knows for certain what price will do next. There is risk in every single trade that we place, and every single idea that we have.
Counter Fear with PlanningThe best way to counter fear in the FX market is planning. After the conversation with my friend, I built risk parameters into my trading plan that will not allow me to lose more than 5% in any given day, or more than 1% on any given trade idea. This is what allows me to look at every trade I place as insignificant in the grand scope of my overall trading career; because the most that it can hurt me is 1/100th of my account value.
Some ideas work out, others don’t. But worse-case scenario, I come back to the game tomorrow with at least 95% of today’s account equity, and a very real chance to move one step closer to my goal.
This part of my plan has truly made each trade I place but one of thousands of insignificant, little trades. There is a big reason that this is important advice. Because if we are ever to attain our goals, there is but one way to do it: By placing lots, and lots of trades. Fear is the enemy in that paradigm, and sitting on the sidelines is only wasting time. Even if it’s a surreal market condition, trade it on a demo account until you have a strategy that you feel is consistent enough to put real money to work.
Because the only thing you will never have the opportunity to gain more of in this world – is time. Time is the only asset available to you in a finite amount. You can make more money, you can buy more stuff, and you can get more of anything else. But you cannot get more time.
Trading gives us the opportunity to make the most of this precious time. Use it wisely.
