Fear is a broad sense of unjustified panic that occurs when market participants as a whole take a generally pessimistic view toward the financial, economic and political future.
Under a climate of fear, traders focus on and amplify any bad news, and are quick to close out long positions or open new short positions.
A climate of fear in the markets is self-reinforcing: as more people become afraid and sell, the greater the overall sense of fear becomes.
Under a climate of fear it is very difficult for an individual investor to make rational investing decisions based on reasonable expectations of the behavior of the market as a whole.
Fear is common in traders because we don’t know what’s going to happen after we enter a trade.
We have an idea of what will happen but we don’t know this with 100% certainty and when you have a lot of money on the line and don’t know what’s going to happen, it can cause fear and anxiety.
A good to way to counterbalance fear is by trading within your means and setting an acceptable loss amount. This way you know, before you even enter the trade, that you are only risking a certain amount.
This takes some of the uncertainty out of the trading process because now we know what is on the line. Every time I enter a trade, I tell myself that I may lose money and that’s OK, just don’t lose more than my predetermined amount!
Another way fear gets in our way is when we are trading with too much size that it makes us uncomfortable and fearful of losing too much money or even worse, blowing up our account. That’s why sizing is so important.
Start off small and gradually work yourself up to larger size. Just because you had a solid month doesn’t mean you should go from trade 500 shares to 5,000 shares.