Fear Factor:

The Trader's in-built Enemy

It's often said that stock markets are driven by greed and fear. In 2005 it was greed's turn to take the wheel and steer the Australian stock markets to good returns from January to September. October marked an abrupt U-turn. The market declined nearly 7.9% in three weeks as fear grew about what was coming next. This pattern was repeated in 2007 / 2008 when the stockmarket fell 25% from its highs and in an even more spectacular fashion during the global financial crisis of 2008 - 2009. Anyone actively trading the market became dazed by the volatility and the unpredictability. For beginners to the world of trading, it induced fear and dread. This 'fear factor' can be a huge obstacle to success.

Dreams of wealth from trading shares and derivatives are often spoken about but never acted upon. The main reason is the fear of losing money. In this article we will discuss some of the better known and effective ways of overcoming this well-documented fear toward trading.

When it comes to trading there are four basic common-sense rules that apply to every beginner: always paper trade before putting in your own money; only trade with money you can afford to lose; identify you risk threshold and lastly; diversification.

Paper Trading:

The first thing a new trader should do when trying to deal with the fear factor is to paper trade. There is no better way than this to learn the trading business. No money is at risk, but you experience the entire trading process, short of calling your stockbroker, (or hitting the execute button with on-line trading) sending in your money and making it official. Virtually any stock can be tracked online or in the newspaper, making it quite easy to see if the stock is moving in your direction or not. The bottom line is that by trading CFDs, Forex and Indices on paper, you become comfortable with the markets before risking any money. And the best part is that it reduces fear.

Only trade with money you can afford to lose:

The next step to reduce fear in your trading is to trade only with money you can afford to lose. Never trade with funds that are used to meet your basic living needs, such as food, rent, utilities and other necessities.

Sleep at Night Factor: Get to know yourself!

This sounds trite but it is a fundamental building block for the long-term successful share, CFD or option trader. Each trader needs to identify his or her own personal risk threshold. If this threshold is exceeded it leads to fear, which impairs the trader from making clear decisions. This all depends on the individual trader's personality.

For example, if you are a risk-adverse, conservative person, trade carefully and frugally. If you are an individual that is risk prone, then by all means take 'considered' risks. Just remember never to exceed your individual fear threshold, whatever it may be. A fearful trader is not a calm, logical trader. When the market goes against your trading, you need to be level headed and have clear precise exit plans. Thus it is extremely important to stay cool and implement your trades with logic and common sense.

Diversification:

As the saying goes, never put all of your eggs in one basket. It is important to diversify your positions as another way of managing fear. The idea is not too buy CFDs, options or shares all within the one industry. Many novice traders in the first couple of years often buy a couple of bank or resource CFDs, Options or stock simultaneously. This is not diversification. This is great if they in your direction, however they can all move against you. The key to achieving large and consistent profits in trading is to diversify your strategies and approaches so you are able to absorb losses and be confident that any one loss won' push you into financial trouble.