It is one of the great paradoxes of psychology that when we run from something we fear, we are more likely to confront it. The important principle here is that we internalize what we are doing. When we act on a certain hypothesis, we reinforce that hypothesis in our minds. Thus, when we run away from a scary outcome, we end up reinforcing that fear.
An experienced trader recently approached me about the fear of not being right while trading. Psychologically, this means that we view being wrong as a threat. The threat of being wrong can become so strong in our minds that we abandon the position before he has a chance to be right!
Every trading plan is an opportunity to work on our psychology. When we set a stop loss for a position, we want to use that stop to intensely mentally rehearse what we want to do if the order is triggered. Often times, we can be stopped from trading, but nothing happens to invalidate the idea behind the trading. For example, I might take a long position on a stock after it made higher profits in the pre-market. The stock stops and begins to retrace some of its initial gains. I became so afraid of not being right that I canceled the trade – only to see the stock soar at the NYSE open when heavy trading volume hit the bar.
However, if I set a stop order, I can — at that time — mentally rehearse the conditions that would put me back in the position.. Just because pre-market flow took me out of an initial position doesn't mean the fundamental strength of the company won't support a higher stock price.
So, many times a trade doesn't work out, but the idea – and the work we put into generating the idea – is still valid. We lose sight of the good work that goes into trading when we focus on the fear of not being right. What makes a trade incorrect is not the same as what makes the idea of a trade incorrect. When we can embrace the possibility that any trade can be wrong, we open ourselves to re-entering positions and profiting from being right.
In-depth reading:
How FOMO can actually help your trading
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