By Yael Warman

Twersky and Kahneman were the firsts to dissect the psychological reality in behavioral economics of loss aversion. Simply put, it states that most people fear losing money more than they desire to gain money.

This was an amazing insight into the mindset of individual investors, and ultimately the market at large. It is often said that the two main motivators in the market are fear and greed. And this showed that fear is a stronger motivator than greed.

In most contexts this is a reference to an investor that undertakes irrational behavior based on fear. When the market is moving fast and economists are predicting the end of the world (particularly if it is a low volume trading day), a trader can lose his or her nerve and close a position because of the noise.

Ultimately, this fear moves the market further than where it should go fundamentally. People get spooked by the movements in the market, listen to the bad news and begin to close positions. The market drops significantly on news or sentiment, often when the underlying fundamentals don’t support that move.

This is what fear can do to those with trades in the market. But what does fear do to a trader who is not in the market? It causes paralysis, preventing a trade from happening.

There are many possible root causes of this fear for the investor.

Fear of failure and fear of loss are two of the main drivers. Remember that people are more afraid of losing than profiting, and so an environment that is apparently “risky” whilst representing a great profit opportunity, would also represent a frightening loss prospect. For those traders that fear control, this situation is a nightmare. An inability to recognize the stability of the market would prevent someone who is afraid of this aspect from entering a trade.

Succumbing to fear is possibly the worst thing a trader can do.

It is a reality that the market and market forces cannot be controlled, and that strong moves will provoke the possibility to loss. Trading profitably is mostly about having a solid trading strategy and then executing that strategy. A strategy that is ruled by emotions like fear is inherently compromised and will not be at all effective. Eventually the fear will rule the strategy, and the right trades will be prevented from being executed.

Fear is also most damaging because it strikes at the very time when there is the most profit to be made. Fear infects the market and the market will respond to this perception of risk. But often that fear is imagined by the market, meaning that there is no real risk. By ignoring the fear and focusing on the strategy, a trader will receive the best reward in a market filled with lower risk.

What are you afraid of?

It’s a question that we often ask children when they call frantically and say that they are afraid. As adults, we understand that fear in and of itself is an illusion. But we also understand the power of the illusion, the strength as it grips you. The feebleness of rational attempts to diffuse the fear. Often the knowledge of its irrationality does not effectively help deal with this problem, and this makes it all the more infuriating.

Ultimately, it is the reality of experience that shows the person that the fear is ungrounded.

So the solution is simple – Face the fear and you will overcome it.

Remind yourself that there is nothing to fear. Accepting the risk, and ignoring the noise and voices of disaster will give you the strength to overcome the irrational.

It will remove the paralysis and drive your trading forward.

What are you afraid of now?

Nothing.

About the Author:

Yael Warman is a creative writer with a strong background in marketing and advertising. Yael has been a writer for over 10 years and has worked for clients in various industries as well as her own companies and is currently the Content Manager at Leverate.