Fear & Trading

BY: Apiary Fund

Fear & Trading

From the adrenaline junkie to the trader, fear is something that runs through the veins of everyone at some point or another. But what does fear mean for the trader? Fear is an emotion most commonly exhibited by traders who want multiple confirmations in their trading. One entry point, be it an SMA crossover or a bullish saucer on the Awesome Oscillator is not enough. Fearful traders need two or three or possibly more entry indications before a trade is entered. This is because one data point doesn’t provide a statistical advantage where multiple data points proves to be a good study. This looks good on paper, does it not? Multiple conformations coming together should prove to be a stronger trade; stronger trade, more pips; more pips means more money. So where is the downfall?

When a trader waits too long to enter the trade, most everyone knows what happens. Most traders have had a scenario like this one: You sign into your platform after waking up or getting home for the evening, start looking at a few pairs to trade, and you see it! The perfect trade setup! The GBP/JPY has broken out of a beautiful, tight, bearish channel and price is going up. MACD and RSI are both indicating strong bullish movement, and you’re just looking at this thinking of how lucky you are for the picturesque setup. You click BUY. Market continues to move up. You’re feeling great. Then, the bullish stretch is met, price needs a retracement to not show as overbought, and the newly started bullish channel just turned into a newly completed bullish channel. All while you’re looking for the close trade button on your screen, the trade went from 47 pips to 21 pips. So what happened? What happened was the trade was entered too late, the trend had begun and was finishing its run before reversing. Similar situations are what fearful traders can experience daily as they wait for more and more confirmations, the trade gets closer and closer to the end of the run and the trade is closed for less profits or even losses at times.

 

Another situation fearful traders may encounter is exiting a trade too early. This is probably the most common fear tactic seen in trading. Once again, you’re in a beautiful buy position, all your instincts, chart reading, and indicators point towards a continuation of this bullish trend for at least another 15 minutes (or a few more hours depending on your time frame preference). However, a slight pullback occurs. This is normal, right? Markets cannot proceed in the same direction indefinitely. There has to be a point where a few pips move back before proceeding forward. It’s like walking a tight rope, occasionally, if you don’t want to fall, your foot has to resort back to its original position before continuing forward. Markets do the same. Any long term channel bounces up and down while in the same direction of motion. But that slight pullback, that balance keeping movement, will take many fearful traders out of a trade and minimize the profit that could have been on that trade.

So what can we do to help control this fear? Multiple trades for the same position is one of the easiest and lowest risk methods to controlling this fear. Let’s take the first trader into account. The first trader won’t enter the trade until let’s say 3 entry confirmations occur. He or she will then enter a trade of 0.1 lots. Let’s separate that 0.1 lots into three 0.03 lot trades. Each time one of the three sought after entry points is achieved, the trader can enter one of the three microlot positions. Once all three confirmations are there, the trader will be in 0.09 lots (close enough to the 0.1 lot initial for most traders but one of the 0.03 can be turned into a 0.04 if so desired). Once enough trades have been placed and there is sufficient data to analyze, the trader can then look at the order history, grouping each set of three trades together, and see which of each set of three made most pips or lost the least pips. The notes section on the “Place Order” menu can be very helpful here in noting if each trade was because of the first, second, or third entry indication. All these trades can then be looked at and accessed, which of the three trades for all these data points resulted in the best outcome. Maybe it was just one confirmation point. Once the trade got the first signal and was entered, more pips were consistently gained and in enough quantity to easily offset the losses that may have occurred. Perhaps it was two confirmations. And maybe it was even three. Either way, here, you can have statistical data to prove which of the three is best and can be more confident and less fearful when it comes to entering the trade.

Now, what if you are the second trader? You enter too early. A multi-trade approach can be utilised here as well. However, as opposed to entering each trade at the same time and closing them at once, the opposite will occur here. The same 0.1 and 0.03 situation will apply. When entering a trade that is looked at as a strong buy or sell, the trade can be entered as the three trades, then every time the trade is looked at as a closure, close one of the three trades. This method can then be analyzed the same way in which the prior was. Once enough trades have been completed, look at how the profits and losses measure up. This data can then be used to quell fears of early reversals or reinforce an earlier exit plan like the one that has been taken all along.

 

Fear in trading is most commonly seen in analytical traders, or traders who like to access multiple data points and have extra confirmation on any entries. Having multiple entries and or exits depending on the type of fear possessed gives these traders the type of data and confirmation that they like while trading while training them to get used to earlier entries or later exits which may prove to be more profitable for the trader.