Fear Is The Enemy, but It Can Also Be Your Friend.
Some Steps That Will Help You To Trade With Greater Confidence.
Traders,
Since I am all in and have purchased this fear all the way down as I promised I would, I thought today might be a good day to review the geo-political events of this past weekend, how they’ve influenced the markets, and what can we do to prevent trading with emotions, particularly, the emotion of fear.
Let’s start with a quick recap because the video I put out on Friday was a live demonstration of what occurs in the markets when fear captures the collective emotions of the markets.
If you remember, while I was recording the video, the dollar, vix, precious metals and commodities, were all spiking rapidly. At the time, I had no idea what the current headlines were as I had not yet read the news for the day. But still, the charts were telling me something big was about to take place. In fact, in the video, I had even suggested that some huge geo-political situation may be about to occur. I couldn’t have made a better guess. Shortly, after releasing that post, I read that Iran may be about to attack Israel and had to quickly update my video/post description with that information. But, I was able to know something big was about to occur just by reading the charts. This is why studying the charts can be valuable. As I have stated in the past, you can often read the headlines before they occur. It was great to have a real demonstration of that in action for proof of how this can happen.
Fast forward to today, crypto markets have liquidated literally billions (not millions) of longs and the dip that everyone had dreamed of taking advantage of is here. And yet, nobody is buying it. Lol. Isn’t this ironic? Why? Answer: Fear.
So today, I simply wanted to take a bit of time to hash out some thoughts on fear and how it can either be our enemy or our friend pending response.
Sometime before COVID became a global pandemic (traces were just beginning to be reported in China), I had posted on my social media account the quote by FDR which he gave in his inaugural address during the depth of the great depression, “The only thing we have to fear is fear itself”. I knew then that depending on how much fear would be accumulated in the collective global consciousness, COVID could turn into something very big and could even change the course of history forever. That it did. It was not the disease that changed history as much as it was the fear of the disease. It was not the death rate. It was not the crash in the markets. It was not even the actions being taken to control the masses by the global power brokers. It was our own collective fear that allowed everything to unfold as it did. And here we are today.
I talk a lot about the fear campaigns that are drummed up by hysteric legacy media which is by and large controlled by corporate entities and political power brokers. Why? Because fear campaigns work tremendously well. It is almost a fool-proof strategy to win if one knows how to take advantage of that fear. And somebody WILL always take advantage of that fear. Often, it is those with the money or power to do so. This is just a simple fact of life. It does absolutely no one any good to simply outright ignore or dismiss this acknowledgment of our current reality. Doing so will only hurt us, the collective, and our cultures and society to a greater degree in the end.
So, how can we understand the psychology of fear and take advantage of it ourselves? In other words, instead of making fear our enemy, how can we make it our friend? Specifically, how can we make fear our friend when investing?
First of all, we must come to terms with our own fears. We must recognize that those fears exist and that they are there for a reason. We can’t ignore the fears. We must acknowledge the fears, accept that they exist, and know that they exist for a very good reason. Heck, if we didn’t have fear by our side acting as an alert system of sorts and a friend, our ancestors would have been eaten by wild animals in the forest thousands of years ago (or some other death-threatening scenario, insert here) and we may not even exist on this planet today. It is because our ancestors acknowledged and listened to their fears that we are even alive today.
That said, there are at least five basic fears of trading that I can think of immediately. There may be more but I think these five fears cover the bulk of our insecurities when entering into any investment. They are:
The fear of being wrong.
The fear of the unknown.
The fear of losing money.
The fear of missing out (FOMO).
The fear of leaving money on the table.
Now, that we can acknowledge our fears, what can we do about them? I will touch briefly on each.
Let’s address the fear of being wrong first. Did you know that statistically there is zero correlation between being right and profitability? Yes, as much as I would like to deny the truth of this statistic, history proves it to be true. A whole article (maybe even a book) could be written on this one point alone and yet, that is not the intent of this post. So, what’s the point? If being right doesn’t get us to achieve our goals of being more profitable, then why work so hard at technical analysis and predictive technologies? This is a great question. I will address the answer in just a sec.
All of us also possess a fear of the unknown. Doesn’t matter who you are. Humans are inherently afraid of change, afraid of the future, and afraid of the unknown. But when it comes to investments, we can actually do something about this. One action we can take is to study harder and expand our knowledge. Over time, taking this one simple action step can help us reduce our fears of the unknown. They may not dissipate completely, after all, we are mere finite humans with extremely limited capacity to know, but we definitely can help ourselves to reduce our own fears of the unknown and this may be just enough of a catalyst to allow us to take a step forward into the direction we were meant to travel.
The fear of losing money, fear of missing out, and fear of leaving money on the table are all essentially money-related fears.
All five of these fears can be addressed by developing and defining your investment/trading strategy before any sort of participation in the market. Thus, in conclusion, the following is exactly what needs to be defined to develop a successful trading or investment strategy that will help to alleviate your enemy fears and make them more friendly fears:
Trade Thesis - before entering any investment/trade know your why. Why invest? Why enter? Why does this particular trade provide the best of all possible options for your money? Why now? Why not later? Etc., etc. Understand your why and be able to articulate this clearly to yourself or others
Trade Setup - Does this particular investment or trade align with your current setup strategy? You should all have one and use it consistently.
Entry Strategy - How will you enter? When will you enter? What will be your indicator, trigger, or alert?
Entry Price - Set a price. Stick to it. Enter there. If it doesn’t work out, move on. The market always gives innumerable opportunities.
Stop Loss Price(s) - You’ve heard me preach on this since the Luna collapse. If your trade drops, at what price will you exit no matter what? Do not ever be so tied emotionally to any investment that you are willing to sacrifice your strategy on the altar of hopium. Get out and move on. See the above point.
Profit Target(s) - Set those targets. Stick to them. Take profit(s). Get out. Done.
Profit-Taking Strategy - Aligns with the above point. Think about as many “what if” scenarios as you can, then develop your exit strategy and execute it accordingly.
Risk - Never bet more than you are willing to lose. Or, should I say, never bet more than you can afford to lose? Because some of us are willing to lose more than we can afford to lose and that will take us out of the game quickly.
Position Size - Never risk it all for the biscuit. This is a sure way to lose it all quickly. It is often why 90+% of all traders fail. You can have everything else right, but if this one thing is wrong you run the risk of striking out and you’re gone for good. Can’t tell you how many times the WallStreetBets Reddit forum has shown me loss-porn illustrating this point acutely. Don’t be a degen. I usually stick to position sizes no larger than 20% of my portfolio and that is only if I am extremely confident. A preferable size is more like 10-15%.
Fear, if utilized correctly, can be beneficial. It should never override logic and reason. It should always take a back seat but it should also not be ignored. Work to make fear your friend and not your enemy and I have no doubt you can become a successful trader and investor.
Cheers to your future successful self!
Stew