The Traders’ Four Letter Word

Chris Shea

As a coach of individuals at all levels of the trading spectrum from beginner to seasoned supertrader, I am often asked what the biggest hurdle is to overcome to become consistently successful. There are numerous barriers to success but the most significant is associated with the four letter word: fear.

Now most people know that fear can have a catastrophic effect on performance in any field of endeavour. In the market context fear and anxiety will cause poor trading decisions and bad trading outcomes because they make you take your eye off the ball and prevent you from doing your job of stopping losses and riding winners. Furthermore fear is dangerous because it tends to create a self fulfilling prophesy: what you fear often comes about.

The impact of fear is often underestimated by commentators and players in the market. It can be pigeon holed as ‘psychology’ associated with the fear of failure or the fear of success in the individual, or associated with the fear of the crowd expressed in times of panic. The trader just has to deal with it. But I want to examine the topic in some depth to increase understanding about it so that strategies can be implemented to master it.

The sources of fear in trading

Trading involves taking a position now in anticipation of a particular outcome in the future. Because in reality the future is unknowable, there is an existential anxiety attached to the role. In other words, uncertainty about what might happen induces fear.

When you open a trade it can either win or lose: the possibility that it might lose can also generate fear. The self talk in this case goes something like this: “I might lose on this trade and that would be terrible, or I might look stupid” and so on. To profit in trading you have to undertake risks: after all the higher the risk the higher return. Those who succeed embrace the risk and allow the potential anxiety to catalyse the efficient management of the risk.

While the anxiety associated with the process of trading is external there are potentially plenty of internal fears within the trader to magnify the external situation.

The basic question for each market participant is: Am I good enough? Am I good enough to handle the risks and reach success? Am I good enough to sustain my success? Personal doubt is always associated with the taint of fear. Add to this other personal issues such as insecurity about money, negative feelings and emotions, and the plethora of fears that lurk in the subconscious of the individual, it is little wonder that fear is a trader’s nemesis.

It’s time to pin down the impact of fear and its consequences for traders at different levels.

Newcomers: the fear of taking losers

It seems that the arena of trading has a never ending supply of people willing to ‘have a go’. In my coaching practice I have come across individuals whose subconscious goal is, for perverse reasons, self harm. But these cases are rare. The vast majority come into trading with good intentions if unrealistic expectations of the ‘psychological demand’ required. It only seems as if most are sabotaging their performance.

It’s in your first trade that fear kicks in. It is much more than the fear of doing something new. It is the fear of uncertainty mentioned earlier and it will be present in every trade in the future, so you must become accustomed to it.

Many beginners succumb to the temptation to deny the fear rather than face it.

Although on a rational level they know losses should be cut, fear prevents the implementation of a stop loss. Fantasy is engaged in the mostly forlorn hope that the loser will somehow turn into a winner. A decision making ‘rigor mortis’ sets in and the loss accumulates.

The anxiety of holding the loser causes the ‘trader’ to deny the trade. Regular review of the position is disregarded: the ‘trader’ says “I’m too busy” or worse still “it doesn’t matter”. Remember the old market joke? What’s the definition of an investor? Answer: A failed speculator!

Eventually the pain of holding the loss gets too much and the position is closed out at a much greater loss than if the initial stop loss had been implemented. This is the point of forced awareness that could be the turning point for the newcomer to start gaining insight about handling fear. I have a number of clients who had lost several hundred thousand dollars before forced awareness caused them to come to work with me on their issues.

Fear that immobilises action has other pernicious effects. Not only does it erode capital but also it prevents other opportunities being taken. Pain and anguish stay in the memory so that future trading is impaired. Fear may spiral so that ‘trading’ gets out of control or alternatively causes the situation where the ‘trader’ can’t pull the trigger to enter new trades.

Unless the beginning trader learns to handle this type of fear he or she will ultimately give up, probably assigning blame to the market or the broker to mask the inability to learn from the experience.

Is this the end of the fear story? Not yet. So let’s have a look at the situation for those who can stop losses and aspire to superior returns.

Aspiring professionals: the fear of riding winners

In my work I have noticed many accounts where not much is lost but not much is gained either. The trader’s ability to cut losses is very much in evidence, but there is the inability to ride winners. Another sort of fear comes into play here. The name for it is performance anxiety and it prevents the trader form achieving superior returns.

This trader uses stops well and can get a winner away, but closes out with a small profit only. He or she does not use the information that the trade is successful to systematically ‘load up’ more positions to take full advantage to build a really profitable stake. The position is closed out early. Profit is left on the table, to relieve the pressure of handling potential success.

Essentially the fear is that the trade might turn against the trader and all the work in identifying and executing the winner will turn out badly. The worry is that he or she may ‘blow it’. This could happen, but because it is winning the trader must override the fear and let the trade run. Perhaps the trader is conscious that when the profit on this trade covers previous losses it is a relief to close out with a ‘satisfactory’ break- even outcome overall.

Performance anxiety belies the truism in the investment world that “you can’t go broke taking a profit”. Performance anxiety ensures that although you might not go broke, you won’t achieve the superior returns available to you either.

Wouldn’t you know it! There is another fear that can raise its ugly head as the trader becomes more competent. It is abandonment fear. This is the fear that instruments or markets may run and the trader might miss out. As a consequence the trader is scanning everywhere for opportunities and may be following and holding far too many positions for his or her capacity to handle. The trader is hyper-stimulated and often ends up suffering from analysis paralysis. The account is all over the place. Burnout is a possibility.

Clients who consult me for assistance with abandonment fear display the features of overtrading.

Supertraders: fear mastered

One of my roles as a coach is to work with supertraders. These are people who have joined the group at the top who not only achieve but sustain superior returns.

Supertraders work with the same markets and thus the existential anxiety that all traders are confronted with. But the supertraders have mastered the fear to enable them to cut losses smoothly and to ride winners to the hilt when they come up. Any one trade is not important; the overall result of their business activity in markets is.

Of course supertraders are vulnerable to specific fears in their own psyche just as much as beginners and aspiring professionals. Again they quarantine if not master any potential difficulties.

In overcoming fear there is a danger for supertraders. It may explain why hedge fund managers and professional traders can go belly up. It’s this. In mastering fear there is the potential that the supertrader loses respect for markets and the uncertainty involved. He or she is tempted, because of past successes, to become complacent or overconfident with an unrealistic belief in their own prowess. I call this hubris. If you as a trader ever believe that you are right and the market is wrong, watch out. Markets do not give special privileges to supertraders or anybody else for that matter.

Hubris will bring you down to earth with a thump to remind you of market uncertainty so that you can replace it with the required humility and discipline.


Fear is a part of trading. The use of bravado or denial does not remove it.

Fear need not be a barrier to success. Rather than see it as a red light, I encourage my clients to acknowledge it as a green light that confirms the risk – reward nature of the business.

As the supertraders demonstrate, fear can be embraced to cause you to become a much better trader. Fear is always there but you can learn how to handle it with strategies that build your control and purpose. When you enable these strategies to master fear, given that other barriers do not come into play, you can power towards the achievement of what you desire from the business of trading.

Chris Shea is a psychotherapist and success coach, who works in particular with executives and managers in large organisations, as well as with traders and active investors.