Adrian Reid explains that fear when trading stems from uncertainty about potential losses and recommends two steps: (1) identify your personal objectives—especially the maximum drawdown you can tolerate without undue stress—and (2) adjust your trading system, risk management, position sizing, and leverage so historical drawdowns fit within those comfort bounds. If your system’s likely drawdown exceeds your tolerance, you will feel nervous executing trades; align systems to objectives to restore confidence.
Chapters
Fear in trading is driven by uncertainty. It's driven by feeling like we might lose more than we're comfortable with. And there's two things that you've got to do. The first thing you've got to do is understand your personal objectives, particularly around drawdown. How much drawdown in your account, how much of a dip in your account can you stomach, still sleep at night, still do what you need, still do what needs to be done? Some people are comfortable with an account that fluctuates wildly. You know, people who are, you know, young, earn a lot of money, have a long kind of career ahead of them, might be happy with a 30, 40, 50% drawdown in their account. Someone who's in retirement and wants to protect and maybe grow a bit of what they've got, might be only comfortable with a 15% drawdown. Your numbers are your numbers. So first thing, understand you, your objectives. Next thing is design your systems, your risk management or position, sizing your leverage to fit within those objectives. So if you know that your maximum historical drawdown, trading your system the way you're trading it now, is well within your bounds of comfort, then you can sleep well at night, you can wake up in the morning, you can pull the trigger. But if you know that trading the way you're trading now, the drawdown could be bigger than what you're comfortable with. You're going to be nervous every time you pull the trigger. So you've got to understand your objectives and fine tune your system, your approach, your risk management to fit them. That's the key. It.
