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July 16, 2012, 3:58 a.m. EDT

Dealing with fear in trading

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About Alexander Elder & Kerry Lovvorn

Dr. Alexander Elder is a private trader and a teacher of traders, based in New York City. He is the author of several international best-sellers, including "Trading for a Living" (1996) and "Come into My Trading Room" (Barron’s 2002 Book of the Year). Dr. Elder runs world-famous Traders’ Camps and is the founder of SpikeTrade.com, a Web site for traders.

Kerry Lovvorn is a trader and a trading coach, whose work has been featured in several books. He teaches advanced trading classes and is a co-author of an e-book "The New High – New Low Index." Kerry is a co-director of SpikeTrade.com, responsible for the nightly market analysis and a trading plan for the following day.

Together, Dr. Alexander Elder and Kerry Lovvorn run SpikeTrade – a unique club where serious traders compete for prizes and share ideas. They can be reached at info@SpikeTrade.com.

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By Dr. Alexander Elder and Kerry Lovvorn

Jesse Livermore, one of the greatest traders of the 20th century, famously said: "There is a time to buy, a time to sell, and a time to go fishing."

Trade for the money, not for the challenge: Stand aside when markets are unclear. With the stock market in its summer doldrums, let's step aside for a moment and focus on trading psychology rather than specific stocks.

One of the most common complaints among traders is the feeling of fear they have while carrying positions. How to deal with it? Nobody deserves to trade with fear. It is a hugely subversive emotion; when you feel fear, the slightest wiggle of the market can scare out of a perfectly good position. Trying to trade with fear afraid is like trying to ride a bicycle with a broken leg. Get off and get it fixed first.

The best method we know of fixing the fear problem is reducing your trade size. If you carried, say two shares of Amazon /zigman2/quotes/210331248/composite AMZN -1.52% for a total of $440, or 10 shares of Schlumberger /zigman2/quotes/201012972/composite SLB -0.62% for $660, you would not feel fear — for sure! You would trade with joy and clarity, and when the market threw a curve at you, you'd treat it as a puzzle to be solved, a game rather than a fear attack.

That is how one learns to trade size — starting with such small size that all fear is removed and gradually moving up to where one can routinely carry six-figure positions.

Sharply cut down your trading size — make it a playful size — and set parameters for increasing your size, after so many good trades go up a step in terms of size.

This is the best psychological advice for eliminating the sickness of fear from your trading life. We consistently address trading psychology, along with technical studies, at our website www.spiketrade.com

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