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Fear of a Sudden Turn of Events

Psychology and Risk Management

What to expect
Risks
• Position sizing
• illusion of control
• Accepting critisism
• Paralyzed by fear
• Loss is a feedback, not a failure
• The flexible trader
• Focusing on the positive
• Short straddle
• The dynamics of greed
• The herd mentality
• Notes

Things have been going well for the previous few months and you currently have a number of roles open. Following a Fear of a Sudden Turn of Events month of terrible weather and natural calamities, there is a sudden increase in interest rates. The markets decline as would be predicted, and many of your positions lose value. How do you behave? A seasoned trader would simply wait it out. You wait for the market to resume its previous trajectory after realising that the modest drop is just transitory. However, many traders are unsure about how to respond. They worry and begin to believe it’s the beginning of a significant bull market when they see their portfolio lose money. What is your typical response? Fear is a common factor.

 

But when it comes to investing, fear may be fatal.

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Fear of a Sudden Turn of Events propensity is biologically and genetically based. Fear and the fight-or-flight reaction are connected. Animals employ fear as a very basic survival mechanism, and it is regulated by brain regions that are really rudimentary. The instinct to either fight or retreat can be incredibly adaptive. A wild animal must gather its resources and decide quickly whether to resist the threat or run away to safety when damage is suspected. However, the fear instinct might divert you from your intended direction while trading the markets. You don’t want to lose control of your emotions and sell off your holdings hastily because you wrongly think that a brief slump heralds approaching disaster. Instead, you should calmly and logically weigh your options before making a decision.

 

It’s crucial to control your fear and prevent it from leading you to act inappropriately. But it’s sometimes challenging to remain rational when your money is on the line. How do you manage your fear? Ari Kiev provides a simple method for managing fear in his book “Trading to Win”: When you admit that you are terrified, the emotion will leave your body and lose all of its power. Refusing to accept your fear will only cause it to persist, however acknowledging your fear will cause it to lessen.

 

Simply acknowledging your fear is the first step toward overcoming it. Trading modest positions is a second strategy for controlling fear. Your risk-taking is lower and your likelihood of feeling dread is lower the less money you have on the line. 3. Control risk. You will feel more at peace and be able to handle worry more readily if you use protective stops and only risk a tiny portion of your capital on one trade. Fourthly, you can trade more circumspectly by ensuring that your trading strategy is in line with a larger trend.

 

Consider a day trade where your prediction is that the market will be bullish. You will be incurring less risk if the market’s longer-term trend is similarly optimistic. Even if the market goes against you during the trading day, you are aware that, in the worst event, you can wait it out and either minimise your losses or even profit. Finally, if things become too emotionally taxing, you can take a break and engage in paper trading. If you are particularly prone to fear, it is likely because you have recently executed a number of losing transactions. As a result, anxiety has become “associated” or “classically conditioned” with losing trades. You instantaneously and naturally get afraid when you start a trade.

 

“Systematic desensitisation” or “counter-conditioning” is a successful technique psychologists have used to overcome excessive Fear of a Sudden Turn of Events, This technique basically takes advantage of the fact that it is impossible to concurrently experience both the terror response and the relaxation response. An incident that previously caused fear will lose its power and no longer cause fear if you feel comfortable and prevent the fear response from happening. Imagine that you are placing a trade, but since no money is at danger, you won’t experience much dread. You are prepared to increase the risk once you can manage your fear while trading on paper.

 

Place a low-risk deal of modest size. Once more, make an effort to unwind and suppress the dread response. If you start to feel anxious, switch back to trading on paper until you can use a relaxation technique to stop the anxiety response from happening. Work your way up to placing a relatively risky trade by gradually executing trades that require more risk until you can do so without feeling nervous. Avoid letting fear get in the way of your trade at all costs. Be able to manage your fear. You can trade successfully if you can do it unrestrictedly and coolly.

 

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