Sunday, March 10, 2024

How to Deal With the Fear of Not Being Right

It's one of the great paradoxes of psychology that when we run from something we fear, we are most likely to encounter it.  The important principle here is that we internalize what we do.  When we act on a particular premise, we reinforce that premise in our minds.  Thus, when we run from a feared outcome, we end up reinforcing that fear.

An experienced trader recently reached out to me regarding the fear of not being right when in a trade.  Psychologically, that means we're taking being wrong as a threat.  The threat of being wrong can become so strong in our minds that we take off the position before it has a chance to be right!

Every trade 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 intensively mentally rehearse what we want to be doing if the order is triggered.  Very often, we can get stopped out of a trade, but nothing happens to invalidate the idea behind the trade.  For example, I might get long a stock on an earnings beat in the premarket.  The stock stalls out and begins to retrace some of its initial gain.  I become so afraid of not being right that I take the position off--only to see the stock roar higher at the NYSE open when large volume hits the tape.  

If I have set a stop on the trade, however, I can--at that time-- mentally rehearse the conditions that would get me back into the position.  Just because a premarket flow took me out of an initial position doesn't mean that the fundamental strength of the company won't support a higher share price.  

So, so often the trade doesn't work out, but the idea--and the work we have put into generating the idea--is still valid.  We lose sight of the good work that goes into a trade when we focus on the fear of not being right.  What makes the trade not right is not the same as what makes the trade idea not right.  It's when we can embrace the possibility of any trade being wrong that we open ourselves up to re-entering positions and profiting from being right.

Further Reading:

How FOMO Can Actually Help Your Trading