When faced with danger, fear is a normal emotional response. When fear is present, it is normal human behavior to be primed for flight or fight: running away from the source of the danger, or stand up to it and face it. Sometimes, however, the dangers we face are not real sources of threat, but ones that we interpret as threats in our minds. When our minds lead us to perceiving normal situations as threats, fear can become anxiety. We tend to want to experience the full flight mode, but there is nothing to run from, or to fight. In this case the danger is in our own perception, not in the actual environment.

When you feel nervous in a position or feel nervous about entering a new trade, it is important to be aware of whether the feeling of anxiety is one of true fear, or one of anxiety. If you experience this feeling, ask yourself the question: ” Is there real danger in the market environment and my position, or is this perception of danger in my mind?”

Fear can be a friend of trading when it points to real sources of danger; an uncomfortable feeling with a position can often precede outward recognition of a change in market conditions. Let's use an example:

When is fear a trader's friend?

To illustrate when fear can be a trader's friend let's say that you have traded AAPL long options for years. You are familiar with the underling's price action and are comfortable placing long or short option trades based on critical support & resistance levels. You have been watching AAPL channeling along and are ready to buy a long call if the upper resistance level is broken. After receiving your entry signal, you move forward with the purchase of an AAPL long call. Just a short time later after AAPL prints a few bullish candles, the trend begins to reverse on higher volume. You are ready to make the move to exit your position is your pre-set stop loss trigger is hit, and you begin to feel nervous about the trade. Sure enough, despite all the entry criteria being in line, AAPL reverses and you let your stop-loss order execute to take you out of the trade.

In this scenario, fear was adaptive. There was real danger out there (AAPL continued its decline past your pre-set max loss level). You knew to trust your feelings and act on your fear, because you could point to a specific source of danger: AAPL making a sudden reversal on higher volume despite the long entry signal and your experience trading the underlying. The challenge in conquering fear is be open to your emotional experience and, at times, trusting in that experience. Taking action solely on emotion can be a formula for disaster, particularly when what you may be feeling anxiety and not reality-based fear. Having said that, however, totally ignoring your emotions can be equally be as detrimental to your trading. When you ignore feelings, you cannot have a feel for the market.

So what do I do when nervousness enters into my decision-making process when managing my positions?

One analogy would compare such nervous feelings to warning lights on the dashboard of your car. The nervous feeling is a warning, a sign that something just isn't right. When you see the warning light go on in your car, you don't ignore it. Rather, you use the warning to determine:

  • What is wrong?
  • What should I do about it?

Depending on which light was on in your vehicle, you might want to stop driving altogether and get the car into a mechanic's facility as quickly as possible.

When nervous feelings take over, the first thing you want to do is to just acknowledge that fact. Say to yourself: “I am not comfortable with the trade right now”. The next step is to ask, “Why am I not comfortable? Has something important changed in the position?”

The second question is critical because it will help you differentiate between realistic fear from normal anxiety you might feel in an unfamiliar or uncertain situation. An example of this could be evident if you recently increased your position size and felt some nervousness about your increased position size. When you ask yourself “Why am I nervous?” You couldn't find anything wrong with the position; it was performing just as expected. This may lead you to the conclusion that you were just feeling some anxiety about the increased position size, which is normal. After reassuring yourself of your stop levels and overall new trading plan, you can now weather the anxiety knowing that all is in order as you had planned.

Fear is a warning light, not an automatic trigger for action. It is the mind and body's way of saying “something just doesn't look right”. As a trader, the best way to control this nervousness/fear is to have a trading plan. When fear overcomes a trader, that fear quite often isn't actually the fear of what the markets will do. It's fear of what the trader may do in the face of fear…fear that there's not enough knowledge, capital, or experience to handle market action. True fear arises when trader's don't feel they can trust themselves to manage the risk that they've incurred. Prevent fear by allocating risk appropriately for the market conditions, and by having a written trade plan for each strategy traded. Then that fear can be managed by adhering to the plan so you know you can trust yourself; and conquer the feeling of nervousness/fear.

If you are learning the craft of trading and feel you need some help , Capital Discussions is here for you. Maybe a mentoring program would help you. The mentors at Capital Discussions have experience in the markets and could get you on the path to becoming a consistently profitable trader. If you would like more information, please contact Tom or Jim. Go to http://www.capitaldiscussions.com/ to get more information.

“A great place for people with similar trading goals and interests to share ideas. The contributors to the Round tables, in particular, add a lot to the overall learning and experience.”
Andrew J. – Arlington, VA

I hope this article helps you deal with the feelings of nervousness and fear. Feel free to comment.