Trading The Stock Market And The Fear of Losing Money
Trading The Stock Market And The Fear of Losing Money
It is likely you are reading this because you have a fear of losing money while trading the stock market. That's perfectly reasonable. Who wants to lose money? It's not fun to lose money. It is painful, scary and downright annoying. I am a pretty forgetful person. I frequently lose my wallet, keys, cell phone, and simply because I forgot where I placed them. I have even misplaced actual currency before, and man that frustrated me so much! By the way, this article is going to go deep.
If by nature you are a very impatient person, do not like reading long articles, and do not enjoy good stories, feel free to skip ahead to Section B.
Otherwise, stick with me. I plan to go a little deeper than you may have anticipated, but I promise your eyes will be opened. You will learn what revolutionized my trading and my life! If you trade the stock market there is one guarantee: you will lose money on a trade, plain and simple. If you're not prepared for this it could be a devastating blow to so much more than just your trading account.
Let's take a moment to define fear. I have read that fear is False Evidence Appearing Real. I truly love that concept! To become a successful trader or even a successful person, you must abolish fear. But where does fear come from and how does one escape it?
Deep down, humans have only two real, primary fears.
The fear they won't be loved, and the fear they won't be enough. Not including irrational fears like the fear of spiders or snakes, which occur from associations in the mind, every real fear we have stems from one of these two fears.
Don't believe me? "This Jerremy guy is crazy!?" you say? I'll prove it. Let's say you want to open a business. Great! Why don't you? Why haven't you done it yet? You've wanted to for so long.
Something is stopping you, but what could it possibly be? Fear of the unknown or perhaps you simply don't know how to do it? How to go about getting the business license, for starters? You might as well be honest with yourself and admit the excuse, because one trip through the World Wide Web can easily solve the business license issue. Legal Zoom is a great resource for starting a business. What if you don't have the money or experience to start a business? Ah, that's it right? Let me interject my totally non-researched opinion and venture a guess. I would say it's probably not a huge stretch to estimate the average cost of starting a business is around $10,000, give or take. It's certainly not as much as $100,000.
I can think of hundreds of businesses off the top of my head that I could start for $10,000. Sure, some are going to require a larger initial investment, but I would bet with a little research you could generate the startup capital. You could get a loan, ask friends and family, use a website to promote your idea to get additional funds, ask your old school teachers, your boss maybe, people from work, venture capitalist, and the list goes on. The universe has plenty of money. If you don't have it, it is only because you haven't asked for it yet. Or perhaps you haven't asked the right way. A mentor of mine told me, "Jerremy, it's never the lack of resources, it is the lack of resourcefulness."
Do you agree with me? Do you believe that if there is a business you want to start and the roadblock is purely a monetary issue you can find a way to get the money? There is always a way. It's been done by thousands of people thousands upon thousands of times. Let's imagine you have an uncle that has some money. All you need is $10,000 to start your business. Your uncle has plenty. Why don't you ask? Because you have a subconscious fear and at its source is your primary fear: The fear you won?' be loved. Your subconscious mind is telling you, "If I lose my uncle's hard earned money he will be really upset with me."
And your uncle is your dad's brother so obviously, your dad will also be upset. And if your dad is upset with you, you would feel unloved or not enough. Ah... interesting...Let's do another example, shorter and a little more random.
Why do people lie? Is it to avoid hurting someone's feelings? Why do they want to avoid hurting someone's feelings? Because subconsciously you think, "If I tell Shelly that her piano recital was terrible she will be upset with me, and if she's upset with me she won't love me as much?"
Another example: "I really like this outfit, but I don't think anyone else will like it and they may make fun of me." In this example you don't feel loved.
Perhaps you've thought to yourself "I'm afraid to quit my high paying job that I hate and go work for company XYZ to pursue my passion of cake decorating, because cake decorators don't make a lot of money and if I make less money my husband will be upset with me." To you an upset husband is equivalent to you are not enough and you might lose some of his love.
We act the way we act, we do the things we do, we avoid saying certain things, acting certain ways, pursuing our dreams, because people may judge us and deep down we have a fear that we won't be loved.
It's time for me to apply this to trading. David just got fired from his job. His wife, Maria, still has her job as an accountant, but they will not be able to make ends meet on her salary alone. Over the course of a few weeks David scours the internet and finds a company to teach him how to trade the stock market so he can make money without even leaving the house. Ah, the dream! Working from home! David pays over $5,000 to a stock market education company. He pulled this money out of his 401K. (Please note, I'm not here to bash other education companies, because that's not my style. But I do have to ask why you should pay for an education when I'll teach you better information, faster, and for free? Ok, my rant is over.)
The other company is a good company. The teachers are good people and there's nothing shady about the company, but they make their money from teaching and selling their products not from actually trading. Again, the company is good, not great. David doesn't learn the importance of trading psychology. He deposits $30,000 into a brokerage account, and makes $7,000 in his first month of trading. Ladies and Gentleman, David is ecstatic! $7,000 on a $30,000 account! That's over 20% in just one month and he is thrilled!
His very first month trading he went five for five, crushed every trade, did it perfectly and boy is he on top of the world. (I told you the other company was good.) Here at Real Life Trading you already know 20% a month is totally obtainable in a good, trending market.
David is the master in control of his own destiny and now he feels like he can fly! He tells his friends how awesome he is doing, pays for the entire tab on a night out with his buddies, buys his wife a present, and he's finally, really happy! Now comes month two. David has $36,000 in his account. He pulled out $1,000 to celebrate. He begins to think to himself, "20% in one month, this is great. I'm going to do 35% this month!?"
He starts his morning day dreaming of the BMW 5 Series that he really wants, the new TV, paying off his credit card debt, going to Hawaii. He is so stoked! Ladies and Gentleman, the market will humble you and it's about to humble David. He enters a trade, a little less conservative because now he's playing with "house money". The risk last month was anywhere from $500 to $1,500 per trade. Now he risks $5,000 of his pure profits on an AAPL trade and the apple takes a bite out of him.
He loses all of the $5,000. Ouch! Hurt, but still very much alive. He calls his buddies, posts on his Facebook wall, and lets people know, "Just traded AAPL today. Lost $5k. Hey, the market does this. It's unpredictable right? I'm still profitable overall! I managed my risk just like I was taught. I got stopped out, no worries. Slow and steady wins the race!?"
He got 14 likes and a bunch of comments. On his next trade he takes it a little more conservatively, risking $100. You know, he does great and makes a $300 profit! Great trade David. You had a 1:3 risk:reward ratio; awesome job. He takes another conservative trade successfully. He can feel the excitement begin to brew once again! He looks at SLV, loves the trade set up, gets super pumped and risks $3,000 on this trade trying to get back to the $36,000 he had at the start of the month. This time though, the trade doesn't go in his favor. He loses the trade, the $3,000, and now his account is at $28,600 and now negative for the first time. His win /loss ratio is 7/9. He's placed nine trades in two months, won 7 of them and is losing money. And here, Ladies and Gentleman from around the world, here is where the fear begins to set in.
David doesn't tell anyone about the losing SLV trade. His wife Maria comes home and asks how his day was. He replies, "Great Babe, not too much to report, kind of a slow day." She smiles, gives him a kiss and goes into the bedroom to change. He sits on the couch and begins to surf the web looking for hop tips, hot stocks to trade, new strategies and around midnight gives in and buys a new strategy-focused class the 'good trading company' just put out. After taking the class the next two to three weeks of trading are improved. His account grows from $28,600 to $29,000 during month three. "Slow and steady wins the race" he reminds himself.
Meanwhile, there are some bills that begin to pile up. The electric bill just came in and it's more than usual because it's hot outside and he's home running the air conditioning all day. The car needs an oil change. He's depleted his savings, the mortgage payment is due and David says to himself, "This is the month of prosperity! I can feel it. I've survived this long and I'm one of the few. Realistically I need to make $3,000 this month to cover these expenses."
He sees a great trade on FB coming up. As soon as he enters the trade long the price begins to go down. He feels his heart thump in his chest. His breathing becomes shallow and he begins to hope; hope that FB goes back up because he really does not want to lose any more money. He knows the market has risks but does not want to lose this trade. He watches the price of FB continue to fall and his losses continue to rise. Two days go by and David is now down $1,600 and can't take it anymore.
He bails on the trade telling himself, "hey, good trade, you didn't lose the $3,000."
He is optimistic as he looks for other trades and is confident FB is now going to tank. Instead it rallies hard, up 6% the very next day and David is beyond upset. He jumps into the trade, price falls the following day, and he bails out for another $1,000 loss. Now his account balance is $25,000, lower than ever before, the bills are still due, he still has no job, no plans for how to find a job, no resume in the hand of recruiters, he hasn't made love to Maria in over two weeks. His life is slowly beginning to spiral down, and his esteem is at an all-time low. The only thing he has is a dream, a hope and a goal of financial freedom. The other thing he now has folks, is a fear of losing money.
And in this example, he will continue to lose his entire account until he conquers that fear .Notice that I said 'example'. Even though the above is fiction, I'm sure somewhere in the world there is a David and/or a Maria who have been through something very similar. I've been in the trading game for many years and have met thousands of people from all walks of life and it scares me how easy it was to formulate the above example. I've seen it happen, literally, countless times. And honestly, each time it comes down to three very simple things. With this, we have now reached the culmination of this article.
1. Fear of losing money
2. Risk management
To make it very short and sweet there are only two reasons you are losing money. You are either trading with money that you cannot afford to lose, or you have no idea how much money you are going to lose.First, if you only have $3,000 to your name, with no job, no future, and no hope, trading is not for you, at least not yet. If you?re at the end of your rope and you just don?t know what to do, please email me. I?m happy to help in any way I can, and I would love to help start you on a better path.
Second, if you as a trader are afraid of losing money, it's because you have no idea how much you are going to lose on any given trade.
Your trades may look something like this:
Trade 1. Gained $100
Trade 2. Gained $167
Trade 3. Lost $300
Trade 4. Gained $67
Trade 5. Lost $90
Trade 6. Gained $200
Trade 7. Gained $142
Trade 8. Lost $20
Trade 9. Gained $20
Trade 10. Lost $319
Total loss - $33. This is an example of a 60/40 trader, really quite a solid success rate, who is losing money.The key, Ladies and Gentlemen, the secret if you will, is to risk the same amount of money on every single trade every single time.
People love certainty. Certainty is one of the six human needs. How can you achieve certainty in the stock market? By being certain of the amount of risk you are taking. The amount of risk you place on a trade is called your R. You can determine your R simply by using 2% of your portfolio value.
Understand that the risk amount is not how much you are going to invest on a given trade, but how much actual money you will lose on a given trade if the trade is broken.To determine exactly how many shares you can trade and to risk only your R, use this formula: R amount / stop value of stock = # of shares to tradeIn the above example, with the 60/40 trader who is losing money, let's use a risk unit of $100 and examine the results:
Trade 1. Gained $100
Trade 2. Gained $100
Trade 3. Lost $100
Trade 4. Gained $100
Trade 5. Lost $100
Trade 6. Gained $100
Trade 7. Gained $100
Trade 8. Lost $100
Trade 9. Gained $100
Trade 10. Lost $100
The same exact trader risking the same amount on each trade can now report a $200 profit. There is one issue remaining with the above example. Most traders, most people for that matter, understand risk:reward. The bottom line is do not enter a trade unless a 1:3 risk:reward potential is obvious.
In other words, risking your 1R unit to get .5 R units (one half an R) is terrible. Why would anyone risk $1 to get $0.50? That just spells "portfolio disaster".
Risking 1 to get 1 is better... but still, after commissions and everything the most likely outcome will be a break even. The goal is to gain $3 for every $1 at risk. Ready to change the above example to a trader who risks the same amount every trade, but this time goes for a 1:3 risk:reward?
Trade 1. Gained $300
Trade 2. Gained $300
Trade 3. Lost $100
Trade 4. Gained $300
Trade 5. Lost $100
Trade 6. Gained $300
Trade 7. Gained $300
Trade 8. Lost $100
Trade 9. Gained $300
Trade 10. Lost $100
$1,800 profit - $400 loss = $1,400 profit. That's a drastic difference from the initial $33 loss we described in the first example.
Truthfully this was the same trader, over the course of eight months, after implementing some things learned from a trading coach. How did this student make such a change? Well, I (oops, I guess I let the cat out of the bag; It's me!) learned the other final step to overcoming the fear of losing and that is simply discipline.Where does discipline come in, you ask? Simple. Discipline is doing what needs to be done, when it needs to be done, regardless of whether it feels good or not. I'll be the first to admit, getting stopped out of a trade can be frustrating and annoying at times, but it has to be done.
I relate this to doing the dishes. It certainly is not the most enjoyable thing in the world, but it sure makes a positive difference. Discipline is simply being able to place your stop and exiting when the trade reaches your stop. Celebrate your stop! Stops are a good thing! You appreciate the brakes in your car don't you? Do brakes speed you up and get you where you want to go, faster? No, that's the gas pedal. Brakes slow you down and protect you from a crash. Case in point, stops are important. So be disciplined! Look for reasons not to trade, take only the best with a 1:3 risk:reward ratio.
Stay in the trade until your target, exit at your target and become a professional Real Life Trader!
For more information on risk mitigation click here.
For additional info on when to move stop click here.
Thanks for reading. If you have any other questions, feel free to reach out to me.