The term “scared money don’t make money” is used in many ways by members of the hip-hop community and in the world of financial markets and investments. But what does that mean?
People who are too afraid to take risks in business, life, and financial markets are unlikely to make money because the rewards come only from the risk. If you do not risk your capital, your capital will not be repaid.
Even if someone wants to invest or exchange money, they can be quite afraid of losing it. One should be able to risk money based on one’s faith in the skills to have a chance to earn money.
According to Neurofinance, trading activities activate the primitive part of your brain responsible for our self-survival and protection. The brain parts are the defensive layers that do not respond to self-talk or will power. Your brain resists any efforts made to turn off those defensive layers.
It is a hard thing to control such instincts that ruin the trading performance of many traders. Although these instincts are really important for survival, when these instincts take control, you may react opposite to what your consciousness wants you to do. You may feel like sabotaging yourself, but actually, it isn’t.
Fear is a natural emotion, and it is quite common to be afraid of failure. Such fear makes you over conscious and conservative that you do not take any risk. Eventually, you do not make any money.
Here are some of the very common reasons why scared money don’t make money:
If you see a heavy downtrend in the market, naturally, you may feel scared to buy, but you may also feel the fear to sell as your instinct could alert you that the train has already left the station. Therefore, you miss an opportunity to sell with the downtrend, and you also miss an opportunity to buy at the bottom when prices are too cheap and below the fair value. It is not bad to think about the risk but thinking too much about it makes you a conservative trader and money doesn’t come from inaction.
Confidence is a key factor in trading, and in order to build confidence you should not trade with the money you cannot afford to lose. If you do so, it will always cause you to second-guess. You will start doubting even your high probability trade setups. Suddenly, you will cut short your profit targets and you may widen your stop loss as well.
You start feeling that your confidence is shattered as you become more conscious about losing the money than you are about your trading strategy. It is a fact that the first responsibility of a trader is to protect the capital, but this doesn’t mean that you become overwhelmed by fear of loss in every trade.
This is a cliché in the forex industry to let your winners run and cut your losses short. However, the opposite of which most traders do. No doubt, this is a primary factor in your success as a trader. Pyramiding is the true success in trading, which is possible only when you let your winners run.
The problem with “scared money” to trade is that the traders watch profit as a profit and do not allow the market to maximize the earning potential. Instead of making an unbiased analysis to maximize the profit, traders with scared money only begin making decisions about their opened positions on the basis of losing the unrealized profit.
Such a fear dominating decision leads to cutting your winners short. It simply results in reducing your 3R trade to worth 1R. It means that you must consistently win trades to stay profitable. However, it is sometimes required to close the positions that are not worth holding due to the rangebound market but scared money forces you to close the position without any reason but fear of losing.
‘Hope’ is a bad thing in trading, and it has no place in the forex market because as long as you keep hoping for a favorable outcome, you are allowing fear and greed dominate your trading.
Those who trade with scared money have a common problem of hoping that their idea would work, and it eventually leads to let the losers run. Instead of cutting the losses initially when you find an invalid setup, you keep hoping that the market would come back to your favor. By the time you decide to cut the losses, the damage has already been done.
One of the success factors in forex trading is to risk only the capital that you can afford to lose. That’s why trading capital is often termed as risk capital. Trading is a zero-sum game, which means that your entire trading account is at risk.
The major reason behind most traders’ failure is fear that stems from the primitive center of their brain. Such an emotion does not let the brain act according to consciousness.
Therefore, traders become too conservative and refrain from risking their capital. Such inaction deprives the traders of making money. Traders with scared money close their winning trades too early. Conversely, they do not cut their losses short because they are afraid of realizing the losses.
Hence, traders are recommended to risk only the capital that they can afford to lose. Applying money management techniques like putting stop loss and take profit and strictly leaving the positions dictated by the market can also help overcome the fear. Moreover, mental exercises can help in significantly reducing fear.
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