It’s stunning how quickly the sentiment changed from unbridled optimism in 2021 to extreme pessimism in 2022. The markets have been quite volatile given the sharp fall in the markets and all the macro shocks. Such volatile phases aren’t easy to trade. Trading is a constant battle against greed and fear, and keeping a level head is extremely hard. But during market phases like these, traders are at a higher risk of being driven by their emotions than logic.
Most traders tend to have a heightened fear of losing money in markets like these. It’s important to understand why we’re afraid. Fear isn’t a bug, it’s a feature and a survival mechanism. Our ancestors were naturally programmed to run as soon as they heard a sound in the bushes. That’s how they survived and adapted. But when it comes to trading, fear can not just paralyse and stop you from taking trades, but it can cause you to make costly mistakes. This reminds me of a humorous quote:
“How did you go bankrupt?“ Two ways. Gradually, then suddenly.” — Ernest Hemingway
But if you want to be an active trader, you must learn how to deal with your fears and have a plan. It won’t be easy, which is why only 1% of traders make any money
. But how do you deal with fear when trading?
The first step in conquering fear is to merely admit that you are afraid. A second way to manage fear is to trade small positions. The less money on the line, the less risk you are taking, and the less fear you are likely to experience. Third, manage risk. By using protective stops and by risking only a small percentage of capital on a single trade, you will feel more at ease and can more easily manage fear. Fourth, you can trade more cautiously by making sure that your trading plan is consistent with a broader trend.