How To Deal With Hesitation And Doubt?
Do you have doubts about your abilities as a trader? Do you hesitate before a trade? Do you do hours upon hours of research only to delay getting in? And then you watch as your trade idea works and you’ve missed the boat?
What’s the remedy? Maybe it’s to be more reckless. Maybe it’s to make too many trades. Maybe it’s to make trades before they’re fully thought out. Maybe it’s to rely on instinct.
What exactly is instinct? What is intuition? And how the hell do you make money with all these confusing emotions?
I did a simple survey of popular topics to write about on the psychology of trading. Not surprisingly, a lot of people wanted to talk about hesitation and doubt. Similar topics were related to gaining more confidence, or how to overcome your fears.
This topic is actually quite deep and complex. So we’ll need to take things one step at a time. First, we’ll need to define what are emotions. Second, we’ll need to understand the relationship between risk and wealth generation. Third, we’ll need to understand the role of emotions in managing risk (2 parts). Finally, we’ll connect everything together to get you to overcome your hesitation and doubt while using emotions in a healthy way to identify risk.
Emotions: What are they?
You’d think emotions would be simple. There’s a whole Pixar movie about them (Inside Out). Children are more aware of their emotions than adults. And adults are better able to control them.
But no. Emotions are actually quite complex. And the official definition of emotions in the dictionary isn’t very helpful in helping us understand them. Go ahead, look it up. I’m not going to write it out here. This isn’t a high school essay.
Instead, I’m going to define emotions in a very specific way. You won’t be able to google this definition to verify that I am correct. Rather, you’re going to have to take it on faith that this definition is the best definition of what emotions are and how emotions work. Once I give you my definition of emotions, I will then work through how it applies to trading. However, you can very easily apply it to other aspects of your life.
Emotions close the gap between what you know and what you don’t know to ensure your survival.
Weird definition, right? Well, there’s a very specific reason why I define it this way.
Let’s say you’re walking down the city streets and there’s a rustling in the bush. IT COULD BE A TIGER!! So, you jump back in fear. After being startled, you realize it was nothing.
The emotion you experienced was fear because the rustling in the bush could have been a threat to your life. Sure, the probability that it is a tiger is 0.000000001% or less. However, on the off chance it actually IS dangerous, your response of fear, jumping back, and protecting yourself is going to 100% keep you alive. On an evolutionary level, fearing the unknown, however irrational, causes 100% survival. However, not reacting to unknowns will cause death if the 10,000th time is a wild animal that eats you.
The key point I want to highlight is the emotion is irrational. It is meant to be irrational because rationality is too slow for the body to act quickly. During life and death situations, we need to act quickly.
We don’t quite live in a world where there is a tiger lurking in every corner. Rather, threats to our lives come in other forms. One of those forms is losing money. Losing money means losing food on the table, a roof over your head, transportation, or even your standing in society. Losing money, if extensive enough, means death to a lot of us. If not physical death, then an existential death.
Therefore, when we go back to observing the phenomenon Hesitation and Doubt in trading, we see it is a natural emotion that is trying to prevent you from losing money (death).
To overcome this, you need to have a strong trading process where you do not see trades as “death,” but rather, a normal part of a consistently profitable process.
But how do you get there? You have fear now, but you need to get the consistently profitable process. But you can’t get the consistently profitable process unless you overcome the fear. But you can’t overcome the fear without the consistently profitable process. It’s suddenly a chicken or the egg problem. Craaaaaaaaaapppp!!!!
Risk, Poverty, and Wealth Generation
You may have come across materials that say, “rich people think differently from poor people.” And then they justify why rich people should be rich and why poor people deserve to live in poverty. Unfortunately, it’s a bit classist. There are some parts that are true. But let me unpack how it all connects.
There are 4 basic concepts to understand how to build wealth:
1 - Asset Prices change when there is Uncertainty
2 - When there is Uncertainty, there is Risk
3 - In order to make money from changing asset prices, you must take Risk
4 - You can reduce the Risk you take with Education – causing improved Reward to Risk ratios and building Wealth
In the section above, we spoke about not living in a world where a tiger will likely maul us. However, we live in a world where loss of money is very connected to death.
I’m thoroughly convinced that poverty is traumatic. As a result, when people go through trauma, they suffer post traumatic stress syndrome PTSD and their brains go haywire when it comes to issues that are related to that trauma.
For example, let’s say you get into a car accident (God forbid) and within that car accident, you see an orange basketball. After you survive the car accident, whenever you see an orange basketball, your brain is screaming, ALERT ALERT ALERT, CAR ACCIDENT IMMINENT and you’ll suddenly go into a panic, even though it is entirely irrational. This is because your brain is on survival mode and the fear response from PTSD is causing your brain to act irrationally.
Similarly, if you’ve ever experienced lack of money, poverty, or some form of not having enough, you’re going to be very afraid of taking risk that could lose money.
However, if wealth generation can only be made through taking risk and you’re too afraid to take risk, then you will never become wealthy.
In the broader sense, if the poor have become traumatized enough that they cannot take monetary risk on an emotional level, and the rich can take monetary risk because they don’t have the same trauma, the poor will stay poor and the rich will stay rich.
That is the psychological underpinning of Risk, Poverty and Wealth Generation.
Using Emotions Correctly – A Strong Process
Believe it or not, emotions are not your enemy. Also, if you have challenges taking on risk due to your past, you’re not out of hope. Rather, you need to understand the true role of emotions when it comes to making decisions and use it appropriately. If done right, you’ll be able to use your emotions to manage risk, allowing your returns to carry you towards wealth generation.
The only way to use emotions correctly is to have a well-defined process for your goals. For our purposes, we are looking to become consistently profitable. I, personally, use a process that professional traders use through the Institute for Trading and Portfolio Management (ITPM). If you have a process of your own that is time tested and works for you, great. You don’t need to use their program. I still want to help you with the psychology of trading.
Once you have a strong process, then your decision making process is regimented. For ITPM, their process involves an analysis of the macroeconomic conditions, then drilling down to the sectors, then industry view of the world. Finally, specific companies are chosen to make decisions on whether to go long or short. With a balanced portfolio of long and short positions, you can make money in both up and down markets.
Whenever I have doubts about myself, I fall back on the process. I fall back on learning more about markets, learning more about myself, learning more about how the world connects. Let’s review the 4 concepts on how to build wealth:
1 - Asset Prices change when there is Uncertainty
2 - When there is Uncertainty, there is Risk
3 - In order to make money from changing asset prices, you must take Risk
4 - You can reduce the Risk you take with Education – causing improved Reward to Risk ratios and building Wealth
We spoke about (1) and (2) before. But now, we need to talk about (3) and (4).
If you want to become wealthy, you must take Risk. If Risk is threatening to you, it will manifest itself as Hesitation and Doubt. However, you can overcome this perception of Risk with Education.
Let me use a real estate example. Let’s say you purchased a new investment property to rent out. What are the risks of owning and maintaining this investment property? It could fall apart on you, you could get crappy tenants, there could be mold, or appliances fall apart.
What if you did a lot of research on the property and checked up on all the possible pitfalls of owning the property? What if you did research on the neighborhood and the trends of the housing prices and reasons why they’re trending upwards? What if you did a lot of research on the tenants and made sure they had excellent credit scores and overall personalities? What is the risk after all this research?
People in real estate manage their risk by doing a lot of research this way. The stated risk from the outside (say, the bank’s perspective) is $X. However, to you, it’s actually much less than $X because you did your homework.
Trading is similar. If you’re going into a trade and you didn’t do your homework, you SHOULD be doubtful and hesitant! You’re about to walk into a dangerous situation with 0 knowledge and lose all your money!! Emotions are working FOR you. You’re going in blind!!
But let’s say there’s a company that has been killing it every quarter. Their growth is exponential and more and more people are purchasing the product. It’s almost becoming ubiquitous. There’s still a lot of room for growth. And after you’ve done your research, you believe they’ll have a strong quarter again. Shouldn’t you be excited at this time? Shouldn’t you want to get into this company asap! Heck, you wish you got in yesterday!!
And haven’t you been here before? You’ve been excited before about a stock. And the stock lost money. You weren’t expecting it. And it hurt when you lost money. You may even have lost big in the past. No matter how excited you are, you’re afraid that you’re wrong. You’re afraid you’ll fail once again. You’ve been traumatized.
Using Emotions Correctly – A Risk Management Tool
We’ve identified that emotions are irrational. As you can imagine, irrational decisions in trading are not good for establishing consistent profitability.
I talk about having a strong process above. However, the strong process is to ensure that when you lean into the process, you will become profitable. The natural response is to ignore your emotions so you can just trade your process. A lot of successful traders recommend ignoring your emotions.
However, there’s more going on.
In George Soros’ book “The Alchemy of Finance” he talks about making trading decisions based on pain he gets in his back. He says when he listens to it, it saves him a great deal of money. Quite irrational, for sure, however, the results are there. He’s one of the greatest traders of our time! Breaking and defying the laws of statistics.
What’s going on with George Soros’ back? It’s likely a somatic manifestation of his emotions. How can we get that for ourselves?
Do you remember what the definitions of emotions are from the beginning? Emotions close the gap between what we know and what we don’t know to ensure our survival.
If losing money is death, then it reasons that once we have a strong process, our emotions can begin to guide us through the uncertainties of the market. Acknowledging our emotions (but not acting on them) gives us a clue on where to investigate further.
Emotions compel us to act (or not act) in order to survive. However, it is based on a gap of knowledge, an unknown in the environment. When you close that gap, your emotion is no longer needed and you can make rational decisions. However, there are times when you can’t close the gap. In those settings, you’ll want to manage risk other ways (option positions, hedging, sizing appropriately).
Let’s say you have a position where you did a lot of research. You know with some level of confidence that the if the trade goes your way, the upside is huge! Winning you 3x or more. And if it goes against you, you just lose your position value or you have a stop order in place. However, you suddenly have doubt and hesitation on putting on the trade.
Your emotions are pointing to something. What is it pointing to? Is it about the trade itself? Or is it about yourself? Is your fear and doubt related to the research you’ve done? Or is it related to a general fear and doubt? What MORE research do you need to allay your fears?
If your fears are connected to the rationale of the trade, then look up things until you’re satisfied. Once you’re satisfied, make the trade.
However, if your fears are not related to the trade, but just risking money in general, then you have some personal work to do. Your fear is a general fear that will destroy all your trades, regardless of the research you do. You need to look into yourself to understand your relationship to money, losing money, and taking on risk. You need to work on possible trauma you’ve felt in the past as it relates to lacking money. You really shouldn’t trade until you get this personal work done. And you cannot become wealthy until you, personally, are comfortable with risk.
Processing Personal Trauma with Money
If you use your emotions to point to the area that needs more work, you will always win.
If your emotions of fear and doubt are based on a gap in your trade idea, then do research to close that gap. Eventually, you’ll have done enough research to be confident. If there isn’t enough information to be 100% confident, then you’ll need to do some other forms of risk management (hedging, position sizing, or other strategies).
Honestly, the above situation is the easy part. That’s just an issue of learning various technical concepts, fundamental analysis, option strategies, or other things that are very teachable.
However, if your emotions are pointing to a generalized fear of taking on risk, then there’s a huge problem. You cannot make money if you do not take risk. If you cannot take risk because you’ve been traumatized by the lack of money in the past, then you need to do trauma work on that fear/pain of your past to move forward.
Unfortunately, we are at the limits of what a single article can do to help you on your journey with trading. However, if you want to overcome any previous trauma from lack of money, I recommend reflecting on these questions:
What is your current financial situation? Objectively, how much money can you actually risk?
What is the earliest memory of losing money or not having enough money? What age were you? How did it make you feel?
What is the most prominent memory of losing money or not having enough money? How does it compare to your earliest memory? Are they the same?
What does money mean to you? What does $100 mean to you in non-monetary terms? How about $1,000? $10,000? $100,000? Is it a new car? Downpayment for a home? A pair of new shoes? What is the meaning of money beyond the numbers?
What are your financial goals and why? Why do you want to make more money?
What of yourself do you need to sacrifice in order to overcome your fear of losing money when you know, in the long run, you will make money? Is it pride? Is it anxiety? Is it an expensive habit? Is it laziness?
What can you change in your environment to make the change in yourself described in (6)?
Yeah, we reached the limits on how much an article can help you. I wish you the best in your trading endeavors. Happy Trading!
Your trading psychology might be the deciding factor for your next BIG win or your next BIG loss.
You'll never know when a guide might come in handy. Get notified when new guides come out below.
