Overcoming Fear

Today I met with a close friend who has shown interest in trading cryptocurrency, and I left him with one very important task. I told him to overcome fear, and to be more specific, overcome the "Fear of Missing out", and the "Fear of Losing Money".

Fear of missing out, or FOMO for short, is quite possibly the number one thing that will kill a traders account, and drive him from ever investing again. Patience is a vital characteristic of a successful trader, and without it you are prone to FOMO.

Let me present an example. You wake up at 9:25, the stock market opens at 9:30, and you hear someone talking about the company $ABC. You have FOMO, so you log into your account, see that it looks like a good place to buy, and you buy in a couple minutes later with no exit plan and no risk level. Not only does the trade go south, but because you did not manage risk, you've lost 10% of your account. Now you are prone to the second kind of fear.

With fear of losing money, you will commit three sins. The first is quite simply you are so afraid of a bad deal, you make no deal at all. Remember kids, you miss every ball you don't swing at. The second sin comes into affect normally after you fell for FOMO.

In the example above, you've already lost 10%, but because you have a fear of losing money, you hold your losing position. You hold and hold in hopes that soon it will come up, but it never does. Finally, it hits a point of no return and you sell out. Losing all hope, all of your moneys, and all your enthusiasm for trading.

There are so many ways the above example could have worked out. First off, with the proper research and experience you would have waited for a proper time to buy in. Secondly, when you did buy in, you would have set the ideal risk level. You wouldn't have risked so much that it would effect your total account, but you would have risked enough to not get faked out by a small drop in price. An appropriate risk level would be so that it does not risk 3% of your account value. Third, if the price did drop down to your risk level, you should have immediately sold, with no emotion. Lastly, if you would have bought into at the right time, you would not have committed the third sin: selling too early.

Many emotional, inexperienced traders not only sell too late once all hope is lost, but sell too early when the trade is going well. Remember, to be successful let your winners run, and cut your losses; not the other way around. Because you have fear of losing money, you take your profits immediately before reaching the proper price point.

Trading stocks and crypto is not hard. It's all common sense and logic. The trick is managing your emotions so that they do not overcome your logic. Over the next couple weeks I will share ways to find the place to buy, sell, and how to manage risk.