Trading Psychology: “I can’t pull the trigger”

October 4, 2014

Q: I know that overtrading is talked about a lot, but I have the issue of “undertrading,” or having the fear of actually getting into a trade. How do I overcome this?

A: Not being able to pull the trigger is on the opposite side of the spectrum of the overtrading phenomenon. Not that either are of any use when it comes to trading, but I’d argue that “undertrading” is actually “better” than the opposite. Overtrading almost necessitates losing money, by definition, whereas undertrading means you’re basically staying where you are, even though you’re still not turning any sort of profit. Overtrading is often a product of negative emotions gone awry, either a Martingale money management system designed to be able to sustain several losses in a row before wiping out completely. Some believe that Martingales that can survive eight straight losses are infallible in some sense because even at 50-50 odds, the probability of losing eight straight is low. But with enough time it will happen.

But undertrading is not a predominantly greed-driven phenomenon like its opposite, but rather one determined by fear. Sometimes, often, or even always, when a trade sets up in a way that fulfills your entry criteria, you are still held back by a fear of putting yourself out there. Stalling occurs based on the fact that it’s your money at risk, and if you lose the trade, then that money invested is gone.

But trading is all about putting yourself out there to some extent. If you don’t take trades, you can’t make money. Likewise, if you take trades there’s always the distinct chance that you’re going to lose money, especially if you’re overtrading in the sense of taking so-so set-ups. Or employing a very risky money management strategy (e.g., Martingale) that entails relatively highly frequent trading. It’s all about striking a balance. Having – I don’t want to say rules specifically – but “rules” in a sense of when you’re comfortable to enter a trade and when you stay out. And, of course, executing this consistently day by day, which comes with good practice and experience. Like any other trade, subject, profession, or activity. When you were growing up, how did you become better at mathematics? Without a doubt, by doing math problems.

I would hope that there are those that find inspiration in other blogs, trading results, educational materials and archives, but ultimately one becomes a good trader by applying what they’ve learned in real time. And yes, with real money (at least a little bit), and being able to control their emotions and general mentality. You acquire positive trading habits over time and any pitfalls are controlled and eventually weeded out through taking the appropriate measures.

The best advice I can give right off the bat is to invest small. You don’t need to invest heavily by any means. Ideally if you’re a beginner or under-funded you bet small and work your way up incrementally. Of course, this means different things to different people. When I signed up with 24option, depositing the minimum $200 and investing the $24 per trade was a lot to me. Eventually I realized I was better off at Markets World. For me, it was simply better to take $1 trades (like you can at MW). It’s a good way to get your feet wet with real-money trading experience without exposing yourself to any heavy degree of risk.

If your risk is high, and you have some triple-digit figure riding on the outcome of this trade, your mind likely isn’t thinking clearly and this manifests in physical emotions and eventually an inability to pull the trigger even if it was a perfectly reasonable trade. When the stakes aren’t as high, this should eventually dissipate. Getting the actual trade execution down comes with practice and application of your particular strategy/system over and over and over again until it becomes second-nature. This can’t occur if your way of trading the markets is still under-tested, or if it simply doesn’t work. It boils down to having confidence in the set-ups you’re taking and applying it consistently in almost a mechanical, emotional-less, and robot-like manner.

But when you’re investing maybe 1% of your total “money you can afford to blow” allotment (kind of like what people do when planning a casino get-away, at least the reasonable ones), emotions will subside, your mind clears, and you can actually put your trading strategy/plan into action. Because undertrading is 100% a psychological hindrance that usually comes down to fear of losing money.

Occasionally, fear of pulling the trigger can also be derived from unsureness in whether the probabilities favor you or the house (the broker). That’s a legitimate concern as well, and even happens to me on occasion. I wrote an article on this topic recently:

Assessing Close Calls: Determining what Trades are Worth Taking

In close calls that are too close to determine, then it’s fine to sit it out and watch and perhaps learn. There’s definitely no harm in that. But a big part of it is sticking with a trading strategy long enough such that it becomes a part of your identity as a trader. Just as I always like to emphasize, a trading strategies that revolves around price action and support and resistance should have its trades planned out ahead of time. You know your level and what needs to happen for you to get in. Then it’s simply about waiting the market to come to that level or levels and set up in the desired manner. If it does, you pull the trigger. If not, you don’t.

Sounds very simple to say, but trading takes a lot of practice and the proper mindset. You’ve probably heard of the “ten thousand hours rule” (popularized by Malcolm Gladwell in his book “Outliers”), in the time benchmark necessitated to become good at a particular skill. It’s not scientific by any means, but emphasizes the general notion that to achieve a high level of mastery in something, it takes plenty of time and constructive practice. And overcoming an overtrading or undertrading issue requires this same level of attention.