Philosophy

Fear and the Art of Day Trading

Fear and Day Trading
Written by Noah Hochman

Nobody ever lost his or her car payment or mortgage payment by paper trading. Paper trading is basically just writing down your entry and exit points for a stock and then calculating the profit or loss. Many of today’s day trading firms have simulators built in to their systems to almost completely replicate the actual execution systems of that firm. I say almost replicate because there is one feature that cannot be reproduced and is very different for every trader. That feature is FEAR.

Paper trading does not give you that funny feeling in the pit of your stomach when your position is tanking, or the elation of seeing the screen turn a lovely shade of green as your stock breaks through a resistance level. Basically there is very little emotion involved when paper trading. New traders rarely understand the psychological effect of seeing real money ebb and flow to and from your account. Having actual money in play is a very emotional thing and many traders succumb to the stress of it.

When I was teaching others to trade I expressed a great deal of concern over how certain people would react to trading real money in real time. It was easy to pick out some of the newbies that would not be able to handle the pressure. There were analysts and brokers who came from big firms insisting that they have been waiting for a chance to trade for themselves. Be careful what you wish for because until you are actually putting your hard earned money on the line you really don’t know how you will react, especially if things go against you. I have had garage mechanics and waiters do much better than some MBA’s and brokers.

When moving from paper trading to real trading give yourself a set of rules that are in line with your ability to accept losses. Position size, and liquidity of a stock should play a large part in how and what you trade. Start slow and learn to deal with the fear and don’t let that fear get in the way with your ability to make sound decisions. When people are down a few days in row they either begin to swing wildly for the fences or become afraid to pull the trigger on a sound trade out of fear it will turn against them.

When I was starting to trade a very long time ago I ran into a period of time when I was taking too many losses. I wasn’t afraid to enter a trade as my logic and chart recognition was sound, however I began taking smaller and smaller profits on my winning trades rather then let them run to where I thought would be a good exit point. Fear dictated my actions and I left much too much money on the table. My risk was the same as if I let the trade work a bit longer but by taking smaller profits I reduced my reward possibilities substantially.

Basically there will always be a certain amount of fear whenever something is at risk. But understanding the risk and learning to consistently make sound decisions regardless of whether you have a negative or positive P&L, you will have a much more likelihood of staying in the game.

Noah Hochman

About the author

Noah Hochman

4 Comments

  • Nice article, Noah. Successful traders and investors are highly disciplined. They understand that the market will manage to diminish their personal qualities and highlight their defects and, hence, learn to trade within themselves, somewhere between fear and greed. Understand that trading is a struggle with yourself as it is with the market and you will do better.

  • Paper trading has its pros and cons but for the beginning trader paper trading can help a great deal. Paper trading allows a person to become familiar with the mechanics of placing an order and managing the trade. New traders may not be familiar with their trading platform which means they can make errors when placing an order but by paper trading with a demo account, a person can help familiarize themselves better with their trading platform before committing real funds.

    Another benefit of paper trading is that you can gain some insight as to whether or not it is time to trade with real money.. Now just because you may have made a few dollars paper trading does not guarantee you will make money in real-time trading but if you are not making money paper trading, then there is a good chance you will not make money when real money is at stake.

  • Excellent article Noah, let me add a little to your article. The old fashion trading always had two basic emotions that must be controlled if you want to have any type of success in daytrading. The first one is fear. The speed in which you can see your hard earned money disappear from your account has produced heart attacks and destroyed many lives. Conquering fear needs to be in steps… in psychology is called “progressive desensitization” or being able to manage larger and progressive amounts of fear intensity without “running for the fences”. That can work in your favor or against you because if you “can handle” a large amount of fear you can also fall into the ego trap of thinking “I’m right, the market is wrong” and stay too long… that alone has destroyed careers and fortunes.
    The second very important factor is the ever ego boosting emotion called greed. That emotion has also destroyed many fortunes and created many awful people. The best way to approach greed is by using discipline (very strict one) to set-up your stop loss and your gain boundaries. Set up from the beginning what you think would be a good return on your trade and hold it dearly… greed will tell you that you have left too much money on the table, that you could of or should of many times made more money, it will even get personal with you and tell you that you are a “pussy” that you have no “balls”… but all that is really a trap. Your decision must be made by math not by either fear or greed and you will be much safer and successful in daytrading.

Leave a Comment