I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Thursday, July 26, 2007

Link: The Fear Of Losing Money

Chris Perruna recently wrote a good article on “The Fear of Losing Money”.
I believe all traders, both successful and unsuccessful traders, will have this kind of fear. I think this fear is normal, particularly for those who trade using their own hard-earned money. However, what differentiate between successful and unsuccessful traders are the way they handle it.
Like what Chris said in that article:

“Many investors fail in this world due to their fear of losing money.
Brilliant people continue to fail at trading the markets because of their
emotions, not their intelligence or their work ethic. It’s their psychological

Successful investors develop systems with expectancies that allow them to negate emotional fear by knowing what can happen if the investment fails. Successful investors are emotionally prepared to handle the side effects of losing money. Unsuccessful investors think about losing the initial investment and more often than not, pass up on a potential golden opportunity.”

Traders have fear of losing money because they don’t want to lose money. But they can lose even more money, or fail to make big money because of the fear of losing money. A few examples:

  • Because of the fear of losing money, traders may pass up on many potential golden opportunities.
  • Because of the fear of losing money, traders are not willing to accept losses. They have stop loss targets in place, yet do not honor the stops, but instead they are hoping that the trade will make a turn. And this hope may never come into reality. As a result, they would realize bigger losses, and in turn, make them even more fearful of losing money.
  • Because of the fear of losing money, traders will take the profits quickly and not letting the profits run.
  • Because of the fear of losing money, traders may become irrational or undisciplined, not following the rules and not confident on their own rules / system.

Personally, I admit I’ve made all those mistakes. It’s really not easy to handle this fear, because the fear was growing, especially after experiencing consecutive losing trades. However, I realized that to be successful in trading, I have to overcome this fear, and learn to accept losses because they are a part of this business. If we cannot accept losses, then we shouldn’t trade.

How to overcome this fear? I agree with Chris. When we make sure that we have positive expectancy system, proper risk management and money management (position sizing), we’ll eventually win the battle over time. Knowing this did help a lot to overcome my fear.
Go check out the full article.