Thursday, June 26, 2008

The Fear of Missing is the Fear of Dissing

A reader recently asked me about a problem he was having with "the fear of missing". It appears that he front-runs his setups, getting into trades before he gets proper signals. This fear of missing opportunity has hurt his performance, as it has placed his capital at risk during periods of low opportunity.

At the very least, the fear of missing signals can result in poor execution. Instead of buying on pullbacks or selling on bounces, you chase the market higher or lower. The several ticks of retracement typically incurred add up to quite an opportunity cost over time.

I'll be addressing the fear of missing trading opportunities in detail in my new book. (One chapter will be devoted to the "ten most common problems" of trading psychology and how to deal with them using psychodynamic, cognitive, behavioral, and solution-focused coaching methods). For now, however, let me focus on one aspect of this fear: the fear of oneself.

Let's say you *do* miss a golden trading opportunity. What will happen? Fear is a response to perceived danger. Where's the danger? What's the threat?

Very, very often the consequence of a perceived missed opportunity is a bout of angry thinking turned inward. After missing the good trade, the trader launches into self-blaming and a beating up process that mixes guilt with self-directed hostility. "How could you be so stupid?" and "Look how much money you could have made!" are among the common self-recriminations.

It is in this context that the fear of missing is really a fear of one's own negative thinking process.

Let's face it: we *always* miss potential opportunity. If you don't hold trades overnight, you miss possible opportunity. If you don't trade your maximum size, you miss potential opportunity. The reasonable trader knows that it's not about taking every conceivable opportunity: that would be impossible. Rather, it's about limiting your risk, while taking advantage of the best opportunities.

But if the result of missing trades is going to be an avalanche of self-criticism, the danger is not financial risk, but the risk of feeling worse about yourself.

If you don't have a negative, self-critical thought process, there's nothing to fear in missing. We always miss the very top and bottom ticks; we always are away from the screen when something is happening. No, it's not about the markets. Most often, the fear of missing is the fear of dissing oneself. The links below, as well as the chapter on cognitive techniques from my Enhancing Trader Performance book, should be helpful in dealing with this problem.


Stilling Negative Thoughts

Breaking Patterns of Frustration in Trading

Trading With Emotional Intelligence


Mark Wolfinger said...

My goal when trading is to make money. Not to make the most money possible. Not to make more than anybody else. Just want to make a good living.

That means it's okay to miss opportunities. I agree with you that by avoiding overtrading you have fewer riskier trades. How can that be wrong?

My question is: Why is this a difficult concept to grasp. Why would anyone chase a trade?

Brandon Wilhite said...

It's not an intellectual problem, but an emotional one. A similar thing that I do is to beat myself up (sometimes) when I have a good trade but could have done better. I have to continually remind myself that, just like you said, no one can buy the very bottom and sell the very top. Objective performance numbers usually make me feel better in that situation. It should be enough to be an overall winning trader and to be able to beat the market.

I think traders are very competitive though, and it's very easy to be hard on yourself.


Federico said...

I used to feel that fear pretty often, until I realized that if I do miss a good trade opportunity, it's still ok because at least the market moved somewhere. Whenever the market moves, opportunities will come.

I am now more relaxed about it and look at the glass half full.

It's much better to miss a golden opportunity with a moving market rather than catch shallow trades within a choppy market.

Krasimir said...

Missing opportunity is one of the core mistakes I take a closer look of (when I define it as a mistake!). The rest are: overtrading, not cutting losses and not running winners.

As Dr Brett pointed out, it is all about perspective and how we define what a valid missing opportunity is. There will be always missing market opportunities. The question is whether the missed opportunity was a valid signal according to our trading plan or not. If you trading plan says you should have taken it - then it is a problem, if not – then it’s alright.

Globetrader said...

Missing an opportunity comes in two different flavors:

One is the missed trade while I was not at the computer for some time and just couldn't take the trade or did not leave a trade open, because I don't like to be in the market when I'm away.

It's a missed opportunity according to the rules.

It might be that I'm angry for a short time, that I think, shit, what shall I do now, that this move has happened and we will most likely see only choppy consolidation for the next few hours. But I missed the trade according to the rules and that is ok, because I have a reason for that rule.

The missed trade which makes a lot more problems and which might actually cause me damage is the missed trade I did not take, even when my inner voice said "Go for it, everything is aligned, you have a signal, take it NOW"

Still for some unspecified reasons, which might be fear, feeling unwell or some other unclear reasons, I override the signal and my inner voice and the market jumps away.

It's these missed opportunities, which cause me problems, because I did not follow a signal, which was there to be taken.

A similar situation arises, when I enter the trade, but then -out of fear to have taken a wrong signal- trail it so narrowly, that the trailing stop will for sure get hit on the slightest wiggle, even if the trade is a good one and the market seconds later does what it was supposed todo.

Most of the times I recognize the symptoms now and stop trading for a while if this problem occurs, because then I know I'm no longer fit to trade. I just don't have the energy and stomach to give the trade the room it needs to develop.
If I don't recognize the symptoms, then the day usually ends deep deep red. Because then unconsciously I will try to make back what I missed with the follow-up trades. And this is a setup which usually ends in disaster.

Brett Steenbarger, Ph.D. said...

Thanks for the insightful comments; I very much appreciate the additions to the blog idea. If you haven't checked out Globe Trader's blog, please do so. Excellent resource, with a solid feel for trading psychology.