Fear of Loss

The fear of loss in trading refers to an emotional reaction of fear or anxiety that occurs when traders face possible losses. This emotional reaction will affect traders' rational judgment and behavioral choices, leading traders to make decisions that are not conducive to their own interests, such as:

Unwilling to cut losses and hope that the market will turn around, the losses are getting bigger and bigger;

Unwilling to let profits run, they close positions prematurely and miss greater profit opportunities;

Don’t dare to enter the market again and miss a good trading opportunity;

Excessive pursuit of perfection and constant modification of one's trading strategies result in analysis paralysis.

The fear of loss in trading is a very common psychological disorder that almost all traders will encounter at one time or another. So, how to overcome the fear of loss in trading? This article will give some suggestions from the following aspects:

Understand the causes of fear of loss in trading

To overcome the fear of losing money in trading, you first need to understand its causes. The fear of loss in trading is not a sourceless water, but is caused by some principles of psychology and behavioral economics. One of the most important principles is loss aversion.

Loss aversion means that people feel different levels of pain and happiness for the same amount of losses and gains. Usually, people feel more pain about losses than they feel happy about gains. This means that people will show different risk preferences when faced with the choice of loss and gain. For example:

When people face certain benefits and uncertain larger benefits, they will tend to choose the certain benefits, showing a tendency to avoid risks;

When people face certain losses and uncertain larger losses, they will tend to choose uncertain losses, showing a tendency to pursue risk.

This explains why traders are unwilling to cut losses when faced with losses, and are unwilling to let profits run when faced with profits. Because they are unconsciously affected by the psychological influence of loss aversion, they make choices that are not in their best interests.

In addition to loss aversion, there are other psychological factors that can also cause fear of loss in trading, such as:

Egocentric bias: refers to people's tendency to overestimate their own abilities and knowledge, underestimate the uncertainty and risks of the market, and thus be overconfident in their trading decisions and unwilling to admit mistakes and change their minds.

Sunk cost effect: when people make choices, they will consider the cost of time, money, energy and other costs they have already invested, instead of just considering the future benefits and risks, which leads to people being unwilling to give up losses on transactions and hoping to recover them costs or make up for losses.

Emotional contamination: refers to the fact that when people make choices, they will be affected by current or previous emotions instead of just based on facts and logic. This causes people to feel panic, anxiety, depression, guilt and other negative emotions when they lose money, which affects them. rational judgment and behavioral control.

Understanding the causes of fear of loss in trading can help us better understand our own psychological state and find appropriate methods to adjust and improve.

Establish a reasonable trading plan

To overcome the fear of loss in trading, you must first establish a reasonable trading plan. A trading plan refers to formulating the specific details of your trading goals, strategies, rules, risk management, etc. before making a transaction. A reasonable trading plan can help us:

Know clearly what you want to do, why you want to do it, and how you want to do it;

Avoid being affected by market fluctuations and emotional fluctuations, and stick to your own trading logic;

Effectively control your risks and losses and protect your funds;

Objectively evaluate your own trading performance and make timely improvements and optimizations.

To establish a reasonable trading plan, you need to consider the following aspects:

Trading goals: refers to what kind of benefits and effects you want to achieve through trading, such as how much money you earn every month, how many times it grows every year, how many points you earn per transaction, etc. Your trading goals must be consistent with your actual situation such as capital size, risk tolerance, time investment, etc., and cannot be too greedy or conservative.

Trading strategy: refers to the method you use to analyze market trends and predict future price changes, such as fundamental analysis, technical analysis, quantitative analysis, etc. Your trading strategy must conform to your trading style, knowledge level, experience and other personal characteristics. You cannot blindly follow others or change at will.

Trading rules: refers to the circumstances under which you enter and exit the market, and how to set your own opening volume, stop loss point, take profit point and other parameters. Your trading rules should be clear, specific, and operable, not vague, arbitrary, or hesitant.

Risk management: refers to how you control your risk of loss for each transaction and overall funds, and how to adjust your fund usage, position allocation, leverage multiples and other factors. Your risk management must be reasonable, effective, and persistent, and cannot be excessive, out of control, or giving up.

After establishing a reasonable trading plan, remember to execute, check, evaluate and revise it regularly to ensure that your trading plan can adapt to market changes and your own progress.

Develop a positive trading mentality

To overcome the fear of loss in trading, you must finally develop a positive trading mentality. Trading mentality refers to a psychological state and values that you hold about the transaction itself and yourself in the transaction. A positive trading mentality can help us:

Correctly view losses and gains in trading as transaction costs and income rather than personal failures and successes;

Face challenges and difficulties in trading proactively, viewing them as opportunities for learning and growth rather than threats and pressure;

Steady control of emotions and behaviors in trading, treating them as tools and means rather than ends and results.

To develop a positive trading mentality, you need to pay attention to the following aspects:

Belief: Refers to the inner certainty you have about whether you can achieve your goals through trading. You must have a strong and positive belief that you have the ability to become a successful trader, and constantly use practical actions to verify and strengthen this belief.

Goal: refers to a specific and clear result you are pursuing in trading. You must have a clear and reasonable goal that conforms to both your trading plan and your personal wishes, and constantly use effective methods to achieve and adjust this goal.

Attitude: refers to the view and feeling you have about yourself and the market during trading. You must have a positive and open attitude, respect your own trading rules, adapt to market changes, and constantly use positive thinking to influence and improve this attitude.

Habit: refers to a fixed and automatic behavior pattern formed in your trading. You must have a good and effective habit that conforms to both your trading strategy and your trading mentality, and you must constantly use conscious choices to develop and change this habit.

Developing a positive trading mentality is a long-term and continuous process that requires us to constantly reflect, learn, practice and improve to achieve our own trading ideals.

Conclusion

The fear of loss in trading is a common psychological disorder that will seriously affect our trading results and financial security. To overcome the fear of loss in trading, we need to start from the following three aspects:

Understand the causes of fear of loss in trading, and recognize your own psychological weaknesses and misunderstandings;

Establish a reasonable trading plan and formulate your own trading goals, strategies, rules, risk management, etc.;

Develop a positive trading mentality and establish your own beliefs, goals, attitudes, habits, etc.