How To Trade When You Are Afraid of Losing Money

How To Trade When You Are Afraid of Losing Money

The setup looks great. Most of your indicators are signalling it is time to enter. Perhaps one or two don't look perfect, but enough things are the chart do that you know it's time to trade. But you just can't seem to pull the trigger.

That's what today's special episode is all about.

In this interview, I talk to three separate "trading shrinks" who talk about how to overcome the fear of getting into a trade. Dr. Brett Steenbarger, Dr. Doug Hirschhorn and Dr. Gary Dayton each give their takes on the problem and their views on things you can do to overcome the fear of losing in a trade.

In each segment, my interviewees discuss the causes of the problem and what you can do to move past it and make those trades - and make that profit!


Tim: All right, first up today is Dr. Brett Steenbarger, a very popular blogger. We'll link to his blog in the show notes for this special episode today. Dr. Steenbarger, thanks for joining me on the phone today.

Dr. Brett Steenbarger: Oh, thank you Tim.

Tim: Well, so those traders that have a tough time when they see the setups coming, the chart presents itself, it's a good trade and inevitably they hesitate. They don't pull the trigger on and of course the trade goes the way they want. The very next time they see it again, they try it and then it doesn't. And so they're gun shy and they don't know how to get over that. Do you have any suggestions for those folks?

Dr. Brett Steenbarger: Yeah. The first before you figure out a solution to a problem, you have to diagnose what the problem is. In other words why might a trader have difficulty pulling the trigger and executing that trade? There are two main reasons. The first is a lack of confidence in the setups that they're undertaking. So that a trader who maybe has looked at some charts, who has read some things, attended some seminars maybe trying to use techniques or trade setups that they really haven't battle tested themselves. They haven't tested it out in any empirical sense. They haven't tested it out in paper trading, and they haven't tested it out ultimately in their own experience.

And so as a result, it's hard to have the depth of conviction in those trade ideas. And that can show up as hesitancy. Now in that situation, the problem is not really that they are not pulling the trigger. Because from one perspective, they probably shouldn't have confidence in those setups. They shouldn't pull the trigger.

What they first need to do is develop the confidence in what they're trading and how they're trading. And usually that means testing things out either in their own experience or in actual historical testing before they put their money at risk.

Tim: So is that as simple as paper trading the strategy before they start?

Dr. Brett Steenbarger: Paper trading is I would say perhaps necessary but not sufficient. In other words, you know paper trading you avoid some of the emotions associated with putting real money on the line. So it certainly is not a total simulation of the real thing, but for that reason it can also be helpful. Because if you take the P&L out of the equation, then you can just practice trading the setups and seeing them work out over time. That gives the confidence. That gives the conviction. Just because someone has shown you a setup or you've read about it or heard about it, it doesn't necessarily mean that it works. It doesn't necessarily mean it works for you.

So the paper trading, I think, is very helpful in figuring out how to execute a trade for yourself and seeing that it works out. Then once you've done it on paper, once you've done it in simulation mode with real market data, then you put small amounts of money on the line. You trade with small size and the risks are minimal. But then you have at least some aspect of performance pressure where real money is on the line and you see the trade setups work for you in that mode. So that gives you the confidence to trade larger, put on more risk, and so forth.

A lot of traders haven't gone through that kind of developmental process where they first practice their setups then they trade them small, and then they trade them larger. They're too eager to get right in there and jump right in and trade. And as a result, they don't have the battle test experience. They don't have the confidence in their setups and it can show up as hesitancy and problems in pulling the trigger.

Tim: Is this the same kind of thing that you see when traders lose five trades in a row and they're hesitant to pull that sixth one which inevitably goes well?

Dr. Brett Steenbarger: Well, I think that's a different situation. That was going to be the second thing I was going to get at. So the first one, is the whole element of experiencing confidence.

The second is performance anxiety. In every performance field there are situations where people start to worry so much about the outcome of the performance that it interferes with the actual performing. So for instance I'm a public speaker and I become too concerned about whether the audience is going like what I say that worry, that anxiety will interfere with my recall and I'll start to stumble over myself during the talk.

If I'm at the free throw line at the end of the basketball game. And the game is on the line and I start thinking to myself, if I miss the shot you know I'm going to ruin it for the whole team. That kind of thinking interferes with my concentration and makes it more likely that I'll miss the shot. And that's called performance anxiety.

It doesn't mean that someone has an anxiety disorder, it's not a mental illness, but it is an anxiety related problem that shows up specifically on performance situations. And what you mentioned, losing a number of trades in a row and then being hesitant on the next one is classic. You're afraid of losing money and that interferes with the performance itself.

Any time P&L becomes more of a concern than the actual process of trading, then you have the potential for interference effects. And that could show up as problems pulling the trigger. People are like you're in the headlights, they freeze up.

Tim: The trouble I guess with the free throw line analogy is that how do I replicate then that end of game scenario in my mind when that situation only comes up in game time. How could you relate that you know back to trading I guess?

Dr. Brett Steenbarger: Yes. Yes. Well, there are a couple of different ways. And there are two ways you could do that. One the research shows that using vivid visual imagery, using visualizations can help prepare people for performance pressures and performance situations. And in fact, they've interviewed some of the Olympic athletes recently who have talked about using visualizations. That before their events, they walk themselves through the events, on the performance pressures of the events and they watch themselves doing the right things and keep themselves in the right frame of mind. And that prepares them then for the actual performance. So I think traders can do that.

And the other element is what I was mentioning before about the preparation. If someone has learned in simulation mode and paper trading mode and trading small, if they've learned their setups then they've already encountered those times where they've had a number of losing trades in a row. And that helps prepare them for the situations later in trading when they're trading larger with more risks from when those things occur.

That having been said, even some of the most experienced traders I know and some of the most successful do become hesitant after a string of losing trades. Because, you never quite know whether the string of losing trades is because you are trading poorly or because market conditions have changed. And so to pull back your risk and to be a little more hesitant after an unusual string of losing trades can be prudent. So that's not necessarily an anxiety problem.

Tim: All right so to sum this up then here, if you're starting out and you're not confident in your system, it's to paper trade at first and see success and see some results there. And then when you do use real money, start very small and then I guess build in size as you feel more confident in this model.

Dr. Brett Steenbarger: And as you experience success with what you're doing. Absolutely. Internally if you develop confidence in your setups, you're less likely to be hesitant in executing them.

And the second thing would be the performance anxiety issues of being focused on the process of trading and not hanging on every up and down in terms of the outcome, the P&L. So that you're truly treating each trade as independent of the ones previous.

Tim: All right, Dr. Steenbarger, give us your website address and we'll put it in the notes as well.

Dr. Brett Steenbarger: Okay, you want that now?

Tim: Yes please.

Dr. Brett Steenbarger: Okay. The blog is

Tim: Excellent. Thanks for your time today I appreciate it.

Tim: All right we're continuing our discussion here about pulling the trigger and ways to help you do that. We're going to be speaking with Dr. Doug Hirschhorn who trained lots of different traders. We've talked to him before in Dr. Doug thanks for joining me on the phone today.

Dr. Doug Hirschhorn: My pleasure.

Tim: Well, so a lot of traders have this issue about of course not being able to - when they get the signal to actually pull the trigger and execute a trade 'cause they have fear about it or they're worried that they're going to be wrong. What are some tips right off the top of your head you can think of here to help them get past that?

Dr. Doug Hirschhorn: When I deal with clients that have that issue, that situation, the core issue or the underlying issue is a lack of trust. And what I mean by that is, it means that the trader do not trust themselves to actually manage the loss or manage the risk if things don't work out, or they don't trust the fact that the market is going to present compelling opportunities going forward. And so because of that lack of trust, they actually fail to pull the trigger when they know that they should be or if they pull it, they pull it way too small rather than big like they want to be.

Tim: So how do you build that trust within yourself? Is it a matter of paper trading? I mean how do you say, now I trust myself to manage this trade well?

Dr. Doug Hirschhorn: It's not paper trading. Paper trading is designed to be actually be an illusion. Even though some people would argue and I even at one point in time in my career argued that if you could paper trade successfully, you could trade the market successfully. The reality is though the paper trading psychologically is very different than playing with real money.

The best was I could say is to trade in smaller sizes. That's how you practice the skill. It would be to trade if you normally trade - let's just talk about commodities or the FX market. If you're trading you know one lot or one contract, if you're used to trading three or four contracts that I would say is maybe try the E-minis or trade smaller contracts to get yourself comfortable with actually putting the risk on and putting the trade on. Because once you can do it with small size and the only differential is changing the default on the size. And it allows you to separate the fact that it's money floating around. It's more about getting in the trade at the right time and the right size.

Tim: Okay. So for someone who is trading even a web-based account through like E-trader or Mirror trade, is it worth losing some money just purely on commissions, and trading 10 shares at a time just to be able to get used to this and get that feeling of confidence?

Dr. Doug Hirschhorn: Yes. But I wouldn't view it as losing money in commissions. I would view it as training, as the cost of doing business. It's kind of like the price you pay for education. If you go to a university, you know you pay to go to a university to get an education, and you graduate with debt. But the assumption is that the information you've learned will either go on to reap the rewards later in life and generate profits in your life and career.

With trading, it's very much the same way. I think traders make the mistake of getting caught up too much in, "oh well I don't want to lose money in commission."

Let me tell you something Tim, if you're trading the markets and if you're actually worried. If you're worried about how much you're paying in commission, really and truly, you're in the wrong game. You have no business trading the market. It's like the old expression. "If you have hundred-foot boat and you actually have to worry about how much it costs to fill it up gas, you probably shouldn't own the boat in the first place."

And with trading, I hear when a trader gets caught up in, "Oh you know, the commission is going to cost you $10 or $5 or $15 or $50." At the end of the day it's like, if you're nickel and diming and if you're P&L. If you're P&L is dependent upon how much commission you're paying, then you really ought to reconsider whether this is the right occupation for you.

Tim: And on the other side, if somebody has had maybe four or five losing trades in a row. That's kind of a separate anxiousness that they have about pulling the trigger for that fifth trade. Any advice for those folks?

Dr. Doug Hirschhorn: That's a fear of re-injury situation that I've gone into in many of my books. Even webinars that I've done where I talk about that.

The fear of re-injury is a psychological trap that traders get caught into. What I would say is that you have to appreciate and understand actually how hard it is to lose five trades in a row. I know traders have done it before. I've had some traders that have lost 10 times in a row. But mathematically the statistics tell us that traders will be right about half the time and they will be wrong about half the time. So mathematically it's a very, very highly improbable event to lose five trades in a row or even six trades in a row. The odds just get quite astronomical.

The problem is traders are actually implementing a destructive behavior. Where they are not again trusting themselves to execute the trades when they should be; holding on to them long enough. Those kinds of things fall into place. So the strategy that I offer to my clients is once again cut back your size, don't stop trading. But cut back your size so that the money you're losing or making is not a distraction to your trade.

Tim: And you've mentioned risk of re-injury which of course brings up the sports analogies. And that's kind of where you got your start in relating sports to trading. What in sports would relate to the fear of pulling the trigger and trading that you've kind of taught athletes to get over in the same way?

Dr. Doug Hirschhorn: It might be a very similar situation where you have a basketball player who has all the skill sets to sink the basket in the field. But then when goes down the court and he sees the opening to land in a shot, instead of taking the shot he actually passes it off. And it's not because he doesn't have the skill set to make the shot. It's because of that moment of truth, he doesn't trust himself to take the pressure and go for the shot. And as a result, ends up taking the more conservative approach and just passes it off.

Tim: Are there some people that you've seen and you've trained and you've talked with and helped that have gotten over this more quickly? And anything they did differently from the folks that really took a long time to get past this?

Dr. Doug Hirschhorn: Yes. The ones that get over more quickly are the ones that put their trust and belief in statistics. And so they say to themselves, you know what it's not about making this shot or making the next shot. In other words it's not about making money on this trade or the next trade. It's more about how do I perform over the course of the month or over the course of the year when I do a hundred trades. So if you look at it as a larger term distribution of trades, it actually devalues the importance of any single trade and places much more value and importance on how you did collectively over the course of a hundred trades.

Tim: Would you say that this is probably the most common fear that traders have? Or is there something else that overrides this even more?

Dr. Doug Hirschhorn: Two very common fears that I see. This is definitely one of them, pulling the trigger to get in the trade. The other one is actually getting in bigger trades. There are a lot of times where I'll have traders that will say, "Okay you know I've got a 55% winning percentage in all my data and statistics look, but I'm just making very little money." And they're actually afraid to get bigger in trades because they're afraid if they get bigger then they're going to have bigger losses. And if they have bigger losses, they won't profitable. Those are the two common things.

The two common biggest setbacks I see are traders are afraid to pull the trigger and get involved. And then second one is actually getting involved big and meaningfully in the trades.

Tim: Right. 'Cause a lot of successful traders will tell you that that's were their money is made. When they're trading well and putting on big size and taking advantage of that is where they make their big money.

Dr. Doug Hirschhorn: It's the moment of pressing when you're up and when things are going well. And then knowing that even though you're pressing, you're riding the wave and that there's going to come a point in time where the wave crashes and you're going to have a big loss. But what you have to say to yourself is that if you press consistently when you're doing well, you'll have made a lot of money on the way up. So giving a little back is not going to make a difference.

Tim: All right listeners you could find out more about this and everything else Dr. Doug has to offer very easy, Dr. Dough thanks for your time today. I appreciate it.

Dr. Doug Hirschhorn: Thank you Tim.

Tim: All right continuing on with our discussion today about pulling the trigger. If you have an issue with that, if you have an issue actually taking the signals that you get as a trader and actually making a trade on those, this is what this is all about.

So we're going to be speaking with Dr. Gary Dayton. He's going talk to us about what he thinks about this issue and maybe some ways you can help solve this for yourself. So Dr. Dayton thanks for being on the phone with us.

Dr. Gary Dayton: It's a pleasure Tim. Thanks for having me.

Tim: All right. So this is a pretty common issue especially among newer traders I would imagine. What do you give advice in terms of how you kind of get over this or get past this fear of actually pulling the trigger on a trade?

Dr. Gary Dayton: Well you need to understand that hesitation in pulling the trigger comes from fear. Two basic types of fear here: Fear of either losing money or fear of being wrong. Kind of the ego side of the equation gets into play here. But you know fear is not necessarily a bad thing. It gives us a good edge in dealing with the outside threats. It's the fight or flight response that we as psychologists often talk about. But unchecked it can really lead to toxic trading and even can be damaging to the health.

Here's kind of how it all evolves if you will. It's not a bad idea to spend just a moment or two talking about this. And then we can then talk about how to deal with it.

But newer traders come into the market and typically they have no plan and no good base or history of practice in their trading. And you know, they're kind of setting themselves up for failure and really learning how to fear the market. Because without a plan or without the base of good practice, they're really trading on random pattern and they're naturally going to have losses and no one likes to lose money. So it's natural to become fearful of trading. And so once primed by the fear response it can set in almost immediately after a trade is entered.

You know, for example it will trigger off uncomfortable body sensations, scary thoughts, frightening emotions. All of these are kind of related to stress and high anxiety. And we naturally want to get rid of that. We want to remove that distress. We want to remove the discomfort. But in that process of wanting to remove the fearful thoughts and the scary emotions and the uncomfortable feeling, we lose focus on the trade. What happens is we're more focused on repairing our emotions than on managing the trade.

And so then, erratic behaviors typically follow. Things like cutting winners short and letting losers run and the like. And we eventually can get to the point - if we do this over and over again - we can get to the point where we're fearful of pulling the trigger. Because the mere thought of taking a trade can trigger off the fear and stress response that's associated with prior losses.

So you know traders can set themselves up in what I call a vicious cycle. They're trying to relieve the stress response, but relief only comes temporarily 'cause it comes back on the very next trade. And so the cycle, we see a trade setup occur the mere thought of having a potential of a loss triggers off the fear response so we don't pull the trigger. Now the plus side of this is that we escape the stress and we escape the fear. But the cost is that we never learn to trade well. So there's a high cost associated with relieving the fear and it just repeats itself. The next time we see a trade setup that setup triggers off thoughts of losses. We try to avoid the stress associated with it and again we never learn how to trade.

Tim: A lot of people I think seem to think the answer is just to remove the emotion altogether.

Dr. Gary Dayton: I wish you could. I wish you could.

Tim: It's just not realistic I guess.

Dr. Gary Dayton: It's really isn't realistic. Because you know try not to have a thought or try not to have an emotion - I don't know anyone and if you do or if any of your listeners do, contact me 'cause I'd love to meet this person. I could write up a good article and become famous. But I don't know anybody who can manage - you know can control their thoughts and their feelings.

Tim: All right. So assuming that getting rid of it is not an option. We're human; we're going to have emotion. How do we then realize it, acknowledge it and get past it?

Dr. Gary Dayton: Well, let's go a little bit deeper with it. The mind is actually working against us here. As human beings we tend to respond to our thoughts and our words and our images that are generated by the mind. You know, kind of what the mind is saying as the truth, as the absolute truth and reality, but often this isn't true. You know if the mind is generating thoughts and feelings and images and memories based on experience and not necessarily reality.

For example, let's take an example right outside of trading altogether. I and another person are standing on a mountain top looking at a beautiful sunset. And I'm remarking my god what a beautiful - you know I can see the colors of red and yellow and this is just gorgeous. Nature is wonderful and I feel at peace and serene with my environment. And yet I look to my left to the person who's standing there, and tears are pouring down his face. And I say, "Well what's wrong? This is a beautiful sunset?" And he says, "Well, I know, but I use to experience these sunsets with my spouse who's no longer here."

So the same experience, the same event but different experiences create different images and different thoughts and different remembrances in our mind. And they cause us to act differently and behave differently okay. So we're learning in psychology that placing too great an emphasis on relying on the mind can put us out of touch with reality. And we have a term for this as psychologists. We call this fusion. It's believing what the mind is saying as if it's reality.

Let's look at fusion for example from the experience of not pulling the trigger. Try to see this as a bona fide trade setup all right and immediately the fearful thoughts set in. So it's like if I take this trade, I'm going to have a loser and other thoughts like I can't stand another loss, okay? And so that influences the action. We don't pull the trigger. And because we're fused with what our mind is telling us, that if we take this trade it's going to turn into a loser. So we let the trade pass and we feel relief, the stress melts away, all right. But then what happens when the market runs in the direction that we originally anticipated? What does the mind start saying then?

Tim: I "shoulda, woulda, coulda."

Dr. Gary Dayton: I "shoulda, woulda, coulda" and a whole lot worse. It starts to chastise us right? And so you know here's the question Tim, which mind was right in all of this? Was it the mind that says, don't take the trade now 'cause you'll have a loss? Or is it the mind that is now chastising us and criticizing us for doing exactly what it told us to do just moments ago, right? And the sad fact is that most traders will believe both. They'll be fearful and then they'll feel down and sad and depressed because they did what their mind told them to do even though the mind is so obviously inconsistent.

So that's fusion. That's believing what the mind is telling us as if it were a reality. And so we need to understand what the mind is telling, it doesn't necessarily predict losing trades. And we need to understand that what the mind tells us isn't always reality. So how do we do that? How do we overcome the fear of pulling the trigger?

To me there are two important ways to do this as a behavioral psychologist. One is to learn the mental skill of being able to pull back from our thoughts and not simply buy into them. We do that by learning to observe our thoughts and feelings. And then the other part of this, the second part of this is to actively take steps in the direction of what matters most for us as traders.

There's a basic question to be asked here. Is being a successful trader more important than escaping the fear that we feel? If so, if that's more important, what kind of steps, what kind of actions do I need to take?

So there are mental skills and there are actions to be taken. And mindfulness, practicing mindfulness is a very helpful way we're finding as psychologists to diffuse from our emotions and what the mind is telling us.

Tim: Mindfulness, what do you mean by that?

Dr. Gary Dayton: Well it comes out of the ancient eastern traditions of meditation and mindfulness as I call it. Just being aware of what's going on in the mind and being able to step back a little bit. Mindfulness teaches us that thoughts and feelings are impermanent. We don't have to act as if they're permanent pieces of reality.

Tim: If I can step in, it's almost like I'm having a conversation with myself for that step one. Okay, I'm having these thoughts that I'm worried about losing money on this trade. I acknowledge it that's there. Now even thought that's there, there are other things that are more important to me than that thought. Let's go beyond that.

Dr. Gary Dayton: Right. Right. Now we're starting to look at our thoughts rather than through them, through mindfulness okay. And as we said before, it's not that the thoughts and feelings go away. These uncomfortable thoughts and feelings, they don't go away. But by diffusing from them, we can begin to develop what psychologists call emotional intelligence, which is basically knowing which emotions and which thoughts to act on and which one to just let go okay. And it does, it creates that mental space that allows us to choose what I call more value trading behaviors than escaping from the distress of fear and being emotionally hijacked from our trading.

So the second part of that is to take trades. Let's assume that you've got a valid trade setup or valid trade setups written down as a plan. Most traders, even after a series of long losses truthfully still don't have that and they're still trading random patterns. But assuming you do have that, assuming you do have a trading edge then do some simulation trading to start off. And you know, I can almost hear listeners say, "Oh yeah, but it's not real money. You know it's not the same." Well do it as if it were real, you know. Here's a good question for you. If you can't be disciplined in treating simulation trading properly then how can you expect to do it trading real money properly all right?

So what does that mean? That means that when you're on a simulator, you assess the risk and reward, you set stops, you set targets. You don't move the stops. You know you don't trade with greater leverage or let a trade run beyond your profit target. You treat it as if it were real.

One good thing a trader can do to help him or her in that regard is to be accountable for it. So in other words when at the end of the day or the end of the week depending on what kind of trader they are, sit down with your spouse or sit down with a trading buddy or anyone you can confide in and say, "Here are my trades this week." Make yourself accountable to this.

But simulation trading is basically practice trading and it's really important. We just finished the Winter Olympics you know a wonderful event in Vancouver. Those athletes spent years in preparation for that event. They didn't just show up to their trading screen and start to trade or they didn't show up to their athletic venue and start to compete. They put a lot of effort into preparation first. And that's what this is all about or that's what I'm talking about.

So once you begin to produce some paper profits, then start trading small, just a few shares of stock. The thing that I trade is the S&P E-minis or you can trade Spy, the ETF for the S&P 500. It trades almost identical to the S&P E-minis. And one E-mini contract is the same as 500 shares of Spy. So adjust that downward to a level that's a little bit of a stretch for you, but one that you can manage emotionally and mentally. Take some time doing this and build some practice time into it. Then gradually increase the position size. So if you start it off with say 50 shares of Spy, go up to 70 or 75 and gradually build yourself up.

What I'm talking about here essentially is graduated exposure. It's one of the best ways to address unhelpful emotional responses.

Tim: Everybody's got that area where it's so little that they're not worried about it. For some people it maybe 10 shares or something. For another person it maybe a thousand shares 'cause they're normally used to trading 5000. So there's this level where it's no big deal. Even if they lost the entire amount to the trade it's no big deal. I guess everybody has a different level where that is.

Dr. Gary Dayton: Exactly. And that's taking actions in the direction of what matters most as a trader. What matters to a trader? Well, identifying trades, taking trades, managing sound trades setups and managing them to completion. And if it's only 10 shares, then it's only 10 shares, but that's still taking a step in the direction of what's most important. And then be mindful about it as you're doing it. Note what thoughts and feelings you're having. And just pull back from them and accept them as thoughts and feeling that pass that come and go.

Tim: All right excellent. Well of course listeners if you want to go to Dr. Dayton's website, Dr. Dayton, why don't you give that us so listeners can check you out?

Dr. Gary Dayton: Sure. In fact I've got a section on mindfulness and your listeners can download a free mindfulness exercise there as well. And that's at

Tim: Excellent. Thanks for your time Doctor.

Dr. Gary Dayton: Glad to be a part of it Tim. Thanks for inviting me on.



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