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How To Trade Through Fear
I once had a client who for the purpose of this article will be called Fearful Frank. He was a 35-year old trader who came into my office because he was stuck in an endless trading slump. At one time he was a cocky, arrogant, fun-loving character, but today he sat before me with messed-up hair, a loosened tie, and shoes that were very badly worn out with scuff marks all over them. Unfortunately, he was about as worn out from his job as his shoes looked on that day. He sat down on my black leather couch and discussed how difficult and humbling an experience it was for him to trade in todays markets. He reminisced about flowing bottles of Dom Perignon and the lifestyle afforded by him and his wife who unexpectedly became millionaires in the late 90s. He complained that he had no desire to get out of bed in the morning to go to work because he truly felt that he had no momentum to get through todays sluggish markets with a profit. He noted that he was “trading scared” in a very uncertain marketplace and he felt like he was a victim for having to give up his Lexus payments and new home in the leafy suburbs of Westchester County, New York. He explained that his stomach churned every time he had to make a tough decision about whether to buy, hold, or sell. Often, Fearful Frank would avoid putting a trade through and instead walked outside of his office building to smoke a cigarette or would check his fantasy baseball team statistics instead. His problems would continue unless he resolved why he was so indecisive and fearful of taking risks, two behaviors that were not consistent with his trading style in the late 1990s.
Did you party hard in 1999?
For many of my clients like Fearful Frank, the late 90s was some raging party. Many of them began to live it up in their mid to late 20s and felt like they were on top of their game and lifestyle in every way imaginable. Many boasted about their new properties out in the Hamptons, their late night partying with celebrities like P-Ditty, and cool new Plasma TVs that they were having installed at the time. Trading at that time was addictive and extremely reinforcing because of the success ratio that market makers and traders enjoyed. I like to equate the trading styles of individuals in the late 1990s to that of a cocaine junky that constantly looks for his/her next high and disregards all negative consequences of their behavior. Everyone on Wall Street was taking risks and felt invincible. One 26-year old trader who wished to remain unidentified recalled that, “being so frequently successful and correct in my decisions about when to buy, sell, or hold, became addictive. It was like I had the Midas touch where everything I traded turned into gold.. literally. I was hooked on the lifestyle of seeking highs and I could barely pull myself away from my trading desk to even take a bathroom break. With every success I envisioned new items that I would buy for my new condo in the city. I thought of the great parties I would have there and which ski resort in Aspen I would vacation at during the winter. It was a crazy time!”
Fearless Frank Starts Trading Scared
Fearless Franks lifestyle changed drastically during the market bloodbath that negatively impacted the lives of thousands of traders in early 2000-2001. He could no longer get out of bed in the morning because he didnt have the lively and volatile markets to rush him out the door in the morning. He felt incompetent and recalled losing money in truckloads on isolated days. He emphasized how embarrassing it was to be driving a Honda CRV to work at that point and how it was a constant reminder of how much of a failure he was. As for his ability to complete trades, he felt completely dysfunctional in his ability to accept loss or take risks anymore. He was trading scared and he admitted to feeling like a “deer starring off into oncoming headlights.” This trader, along with many others that I have worked with, was burned very badly on some recent trades and felt great pressure from his family and fund manager to make more money.
Turning Fearful Frank into Fearless Frank
Fearful Frank and at least 20 other guys I worked with or knew personally were suffering from what I call “behavioral paralysis” when it came down to making a split-second decision of whether to buy, sell, or hold, because they obsessed about their last bad trade and how accountable they would be if they were wrong again. I offered Fearful Frank 3 Golden rules for trading in todays markets.
1) Dont Aim! Just throw the ball!
Fearful Frank was pressing too hard to be right on every trade created by irrational fears, thoughts, and a nervous stomach stemming from previous bad trades and he was not quick enough in his decision making because he lost his risk appetite and belief that he was competent. When I was 12-years old I pitched for a team in my local Little League. I was admittedly a wild southpaw but my coach thought I had potential. To this day I can still hear him yelling at me between pitches to “stop aiming the ball! Just throw the ball to the glove!” These words meant nothing to me then, but now I use them with my clients in practice as a way to get them to clear the “noise” in their heads before making a trade. Sometimes if you think too much or obsess over a past failure, you will think your way into a very bad decision that will cost you like it did for Fearful Frank. If your research tells you which stance to take on a trade, follow it, be disciplined, and just throw the ball!
2) Go For the Batting Title and not the Homerun Crown
Fearful Frank and many other traders lost a great deal of confidence in themselves from abrupt lifestyle changes and repeatedly failing on trades. My advice for these wounded individuals is based on a theory I developed called the Dave Kingman Theorem. For many of you it is time to accept that you are dealing with a new kind of market. Whereas, you might have been successful swinging for the fences on every trade back then, that strategy may not be working for you in the sluggish markets of today. Maybe its time to look at yourself as a singles and doubles hitter that only swings for the fences when you are absolutely certain of succeeding. Trying to be a homerun hitter in todays market will make you experience a great deal more strikeouts than successes. Remember that Dave Kingman and most power hitters had many more strikeouts than homeruns. Often they were embarrassed by crafty pitchers who fooled them on hanging curve balls that they were out in front of. In trading, too many failures or strikeouts can lead to fear, uncertainty, and paralysis, all of which prevent you from becoming a top performing trader. Adapt your trading styles to the new markets and you will bring home the batting title, not the homerun record. You will be happier and enjoy your profession a great deal more.
3) Think Bullish, Not Bearish:
“Bullish Thinking” or the ability to see the sun through the clouds is a technique that I taught Fearful Frank and other traders for the purpose of bringing them back to the top of their games and to avoid trading scared. How “bullish” or “bearish” an individual perceives his/her past successes or failures will determine the outcome of future trades. If Fearful Frank and Risk-Taking Roy both suffer from $20,000 losses on the same day, but only Risk-Taking Roy has the ability to view the loss as a part of the trading game and as an isolated one-time mistake, only he will continue to trade according to his discipline and without fear. When you notice that you are experiencing that churning feeling in your stomach while you are watching a stock price decline that is the first signal to you that there are some bearish thoughts and negative emotions entering into your mind and body. What you say to yourself at this point is critical for your success. I had Fearful Frank sit down in my office, close his eyes and think back to some of his successful trades that he initially thought would be risks. Think bullish and understand that taking risks are part of the game and that if you stay true to your mental stop-loss position, you will at least live to see another day of trading. Fearless Frank is Back! The point of this whole column is that there is hope for all of the Fearful Franks out there who cant get back to work in the morning and trade with confidence. Fearless Frank has recently traded in his Honda CRV and has progressed ever so slowly back to a respectable Audi. His swagger is back and his purchasing power during the Christmas season is looking promising this year. In trading, as in baseball, you are only as good as your last trade or at bat, but only in baseball can someone watch film of their successful moments. Appreciate and recall some of your triumphs and repeat to yourself three times when you get out of bed in the morning the statement “Today will be the day!”
757 3rd Avenue   |   New York, NY 10017   |   (646)600‑9011   |   DrAldenCass@gmail.com