This week’s question comes from Elvis, who asks:
How do I eliminate fear? I often have the right setups, but I end up entering too soon or exiting too early once I see a little profit. Or I take revenge trades to make up losses and end up losing even more.
The idea of eliminating fear when trading Forex is a nice thought. But the truth is, it isn’t possible to rid yourself of it entirely.
No matter how much experience you gain, some fear will always exist. It’s just human nature.
But a healthy fear of something can be a good thing. It shows that you care and have some level of respect for whatever it is you’re doing.
An unhealthy fear, on the other hand, can be destructive.
It tends to occupy your thoughts and in many cases controls the decisions you make. As a trader whose job it is to make logical rather than emotional decisions, that’s a problem.
So how can you reduce the unhealthy kind of fear and turn what’s left into an asset?
There are a few simple ways to accomplish this which I’m about to share with you. I’ll also tell you how I like to handle losing streaks, which is when fear likes to run rampant.
1. Reduce Fear by Cutting Risk
The fear you have when trading stems from a fear of losing money. If you remove the money aspect, there is nothing to fear from buying or selling a currency pair.
Think about the last time you demo traded. Did you have the same level of fear as when you risk real money?
I bet not.
This disparity is the single biggest hurdle when moving from demo trading to a real money account.
So if we know that money is the primary cause of fear and stress while trading, the easiest way to reduce it is to decrease our risk.
One simple yet effective tactic is to take your current risk and cut it in half. Whatever it is, divide by two.
So if you currently risk 2% of your account balance, try risking 1%. Even if you already risk just 1% yet you’re still making decisions out of fear, cut it in half to 0.5%.
As I’ve mentioned before, your Forex journey doesn’t have a predetermined deadline. No boss is hovering over your shoulder demanding that you make $20,000 next month.
It’s all up to you; it always has been.
Why not try slowing things down a bit and risk a little less on each position? I can all but guarantee that it will help to ease any feelings of fear you’re currently experiencing.
The idea is to reduce the amount of money at risk so that it’s no longer a factor.
But the exact number isn’t something I can decide for you. Everyone’s tolerance for risk is different so only you know what it takes to reduce the fear of loss from your trading.
If a trader is motivated by the money, then it is the wrong reason. A truly successful trader has got to be involved and into the trading, the money is the side issue… The principal motivation is not the trappings of success. It’s usually the by-product – simply stated ‘the game’s the thing’.
The best and easiest way to make money the side issue as Bill Lipschutz says is to risk less. As soon as you begin doing that you’ll be able to focus 100% on the price action in front of you.
2. Don't Trade
This may sound like I’m trying to be funny, but an even easier way to remove fear is to stay on the sideline.
Seriously, don’t trade.
Just like you have no boss telling you how much to risk, nobody is forcing you to trade. That EURUSD short may look enticing, but if you’re coming off back-to-back losses, you may want to take some time to collect your thoughts.
When you suffer a string of losses, your confidence suffers. When your confidence suffers, your fear meter goes through the roof.
Think of it like this…
Overtrading causes unnecessary losses.
Too many losses can destroy your confidence.
A lack of confidence leads to fear of loss.
So you see, I’m not joking when I say that not trading is an excellent way to overcome fear.
Of course, you need to put on a trade eventually if you want to make money. But be sure you’re choosing quality over quantity.
By doing this, you keep your confidence intact which will help reduce any fear you might experience otherwise.
It’s for this reason that I enjoy staying on the sideline. It’s the only place I can actually relax and just watch the price action on my charts.
How to Bounce Back From a Losing Streak
Before I wrap up this post, I want to touch on something I mentioned in the last section on how to handle a losing streak.
What we discussed in the first two sections above ties in nicely with a tactic that can help you bounce back from any losing streak.
All too often a trader will make a considerable gain only to give it right back. The “give it right back” part is often a series of bad decisions.
What’s worse is that those decisions are usually back-to-back, sometimes within a single day.
Want to know how to avoid those situations?
Of course, you do!
It involves two steps that just so happen to be the first two sections of this post only in reverse order.
The first step is to simply not trade.
So if you suffer a loss, stay out of the market for the next 24 hours. This short break is enough time for you to gather your thoughts and refocus your efforts.
Step two involves cutting your risk in half.
If you lost 2% of your account balance on the first loss, you’d only risk 1% on the next trade.
And if you lose on that second trade, you’d cut your risk again to just 0.5% of your account balance.
Did you lose on the third trade too?
You know what to do. Cut that 0.5% risk to 0.25%.
You get the idea. As long as you’re on a losing streak, each position size should be half of the previous one.
Just be sure you’re taking that 24-hour break between each trade.
The tactic I just shared is what I use if I go through two or three losers in a row. And take it from me, it doesn’t matter how much experience you have or how good you think you are, losing streaks happen.
It isn’t a question of if it will happen to you but when and the only thing that matters is how you handle it.
Most traders do the exact opposite of what I just described. Instead of cutting risk after a loss they increase it in a desperate attempt to make back what they just lost.
This behavior is something referred to as revenge trading.
At some point, you have to separate yourself from the crowd. You have to choose to do things from a logical and disciplined approach and get off the emotional roller coaster.
If you know most traders lose money and the majority also revenge trade, what does that make you if you do the same thing?
If you find that fear has too much control over your trading, try cutting your risk in half. If you’ve been using 2% of your account balance, try risking 1%. Keep cutting your risk until fear is no longer a factor.
In addition to cutting your position size, staying on the sideline is a great way to calm your nerves. By taking just a few quality setups each month, you’re far more likely to keep your confidence intact which translates to a higher chance of profiting.
Remember that a losing streak can affect your confidence and a lack of confidence attracts fear. The best way to avoid this predicament is to stop overtrading and instead focus on protecting your capital at all times.
In a losing streak?
Try taking a 24-hour break and also cut your position size in half for the next trade. If you lose again, repeat these two steps until you regain your confidence.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.