Achieving Emotional Control in the Midst of Trading Uncertainty

Articles on Trader Psychology by Rande Howell, Trader Psychologist




When I am not trading live, I know how to trade.  Paper profits keep adding up, and I can feel the potential that trading should be able to deliver to me.  After proving to myself I’m ready, I start out confidently trading live.  Sooner or later, something happens. I fall apart and I’m back struggling again.  I start doing things that I know better than to do. Afterwards, I am puzzled how I didn’t follow my rules.  I re-double my efforts and keep trying harder, waiting for things to turn my way, and it’s growing old.  This has been going on for years now.

Talk vs. Effective Action

People confuse knowledge of trading and performance in trading all the time.  And why not?  It feels good to talk about trading.  To the brain, that feeling good is perceived as real.  The trader feels it, so it must be real.  It’s as if knowledge and effective trading are the same.  In this line of reasoning, the more knowledge you have, the more skillful you are in executing an effective trading plan.  This is what student traders are led to believe.  And they want to believe it.

Yet there are legions of traders who have great knowledge of trading, but who consistently underperform when the money and the risk are real.   Unfortunately the trading account separates fiction from effective action no matter how good the talk feels.  Walk into any trading room or trader gathering place and you hear the “talk”.   The traders talk trading as if they knew what they were doing WHEN THEY ARE IN THE ACT OF TRADING.  This is a common self-deception that traders indulge in all the time.  The feeling of confidence does not translate from talk of trading to effective live trading.

The chemistry of feeling competent and confident literally blinds the trader from learning how to operate effectively in a probability-based reality.  The brain of the trader prefers the illusion of control in the short-term over the reality of effective action in the long-term.  And until the trader wakes up to the way his brain influences his mind’s perception, he or she stays stuck in feeling good while talking but performing poorly when engaging uncertainty. 

There is even a term for this phenomenon.  It’s called cognitive dissonance.  Put another way, the brain prefers holding onto beliefs, even when the facts don’t support the belief.  And the more evidence there is that conflict with the belief – the more the brain (and the trader) digs in its heels and stubbornly refuses to adjust the belief to actual experience.  If this sounds theoretical to you, just ask yourself why you keep making the same mistakes in your trading over and over again.  On one level you see that what you are doing is not working – but you believe that success is right around the corner.  And you “feel” certain that a few external changes in your trading strategy is all that separates you from becoming the trader you envision yourself to be.  The problem is that your growth as a trader has been stuck in this loop for years. 

Internal change?  Not a chance.  Your brain is convinced that the problem is outside of the self.  Though the evidence points to the need for internal self-development.  The brain prefers the feeling of short-term competence and not facing the need for change rather than the long-term opportunity of re-designing the mind for effective trading. 

The Key is Learning How to Harness Emotions

This gap between talk and action is the trader’s emotional intelligence deficit.  People (traders included) don’t understand emotion and its impact on being able to use knowledge under the pressure of performance where something valuable is at risk.  In their ignorance traders try to ignore, deny, or bull through emotions as if they were minor annoyances.  And they have become really good at this pushing away of emotions in many areas of their lives – until they got to trading.  Then it became a whole new ballgame.

Suddenly they were being hijacked and ambushed by emotions where, in the past, a hard-driving attitude subdued emotion.  In particular they learned how not to feel the precursor to fear – vulnerability.  Where this trait (of not feeling or acknowledging fear in its early stages) used to provide an advantage, suddenly (in trading) this lack of emotional knowledge becomes a liability.

Everybody physically feels the vulnerability awaken in their bones when they engage uncertainty with capital at risk – that’s human.  This is why the brain of the trader so wants to maintain the feeling of certainty – it feels good and the trader becomes addicted to it.  The difference is that the seasoned trader responds from a position of strength while the struggling trader comes to the moment in a position of weakness where he lets the survival instincts of the emotional brain dictate what the mind thinks.  Through training, the seasoned trader knows how to manage the emotional response to that unavoidable vulnerability very differently than the struggling trader.  He or she becomes centered, calm, and deliberate while the struggling trader falls apart emotionally under the same circumstance.

Waking Up to the Drama of the Emotional Mind

While you are quietly thinking that you are a rational being who is applying logic to their trading, underneath the surface there is a powerful internal struggle going on in your mind.  In a trader’s tunnel vision this world is not seen until it erupts to the surface and blows up the illusion of a rational mind.  If you have ever hesitated to enter a perfectly good set-up, experienced a frozen finger when you were supposed to be pulling the trigger, gotten crazy and revenge-traded after a loss, or become over-confident and over-traded - then you have experienced the internal struggle that happens anytime that the brain encounters uncertainty and the unknown.

The reactive behavior is simply neural circuits that have been habituated into standard practices that pop up without thought.  It is the default programming inherited from evolution and learned during your brain’s formative period.  This is the brain’s automatic learned response to encountering changes in environmental status changes.  That disruption to standard pattern creates a sense of vulnerability in a potentially dangerous world. 

It is this vulnerability that creates the emotional cascade that derails logical thinking (so vital to effective trading).  Your trading brain is the same one that was escaping saber-toothed tigers just a few short evolutionary years ago.  Because of the ever present danger of the world of our ancestors, the limbic system (your emotional brain) evolved to make lightning fast survival decisions when it faced uncertainty.  That included by-passing the developing thinking brain when there was a threat to short term survival – which was common.  Instead of thinking in the midst of uncertainty, short-term survival instincts drove the interaction with the uncertain environment.

And one emotion in particular gave the highest chance of survival – fear and its cousin, aggression.  You see the avoidance of fear in your hesitation and you see the aggressive response to the threat in over-trading and revenge-trading.  But because human beings are social mammalians, the fear response to uncertainty is moderated or exacerbated by our connection to other members of the group we are with (our tribe).  And this is where there is a big failure in the capacity of traders to manage their fear of uncertainty.

Your Mind is a Fractal of the Group

What you call your mind is actually a community of emotional programs that have competitively organized you into a self.  That’s not “you” trading.  The “you” is really the winning combination of emotional programs that act in concert with one another for short-term survival.  The emotional programs are given voice in your mind as thoughts.  The question is really about what parts of the self (all those emotional programs) come forward and engage uncertainty.

In groups of chimpanzees and human military platoons on patrol, when there is the triggering of uncertainty, a surge of potential fear does erupt in their bodies – getting them ready for action.  What happens next is the missing link in emotional state management for traders.  Their eyes lock onto each other.

This linking of the individuals into a group to face uncertainty together is what regulates their fear and allows them to operate from a centered mindset.  Together they are strong.  Left to their own devices they become emotionally reactive.  In the same way that we are social mammalians that operate as a group to face uncertainty, the trader has a social brain composed of emotional programs with different agendas.  And when the individual trader brain is exposed to uncertainty, the emotional programs act as a group.

You can’t change the uncertainty of the world or the markets, but you can change the organization of the mind that engages the uncertainty of risking capital.  In this sense the mind acts as a committee.  And this is where traders often fail.  They don’t take control over what they can control.  In their tunnel vision, they don’t see the committee of the mind.  They only see “my thoughts” as if you were having thoughts rather than the truth - that thoughts are having you.  This is what the trader can learn to control, their internal locus of control.  Outcome was never controllable, no matter how bad the brain and mind want to control environment and outcome.  But you can control the mind you bring to the management of uncertainty. And that makes all the difference in the world in trading performance.

Who Do You Connect to in Times of Trouble?

When things get past their comfort zone, traders rarely connect to internal resources that give them a psychological edge.  Instead they turn to a negative or tempting voice in their mind.  Unlike the trained chimps and platoon members, untrained traders do not connect to a committee of resources in the mind that is capable of managing the uncertainty of the moment.

What they hear is a critical voice in the committee of the mind that dominates thinking.  Who hasn’t heard this voice?  When you are trying to keep your act together in a tense moment of trading decisions, have you ever heard something say – “you could be wrong, what if you’re wrong, you’re going to lose”.  Conversely, the inner critic (as tempter) will urge you to take back what was taken from you or tempt you into chasing trades that you later regret.

Both the chimps and the platoon on patrol recognize potential trouble and reach out for help, comfort, and support.  This is the mind that has to be developed for managing the uncertainty of trading and life.  Are you currently reaching out to allies who can support you in creating the empowered mind needed for probability management?  Or are you still locked into individual self-reliance?  (Thereby missing the opportunity to redesign the mind that engages uncertainty.)  The fear has to be comforted for an empowered mind to emerge.  Even you, as an individual, do not live apart from the inner resources of your emotional programs that create the mind you trade with.  The inner resources are there, waiting for you to connect to them.  You have to reach out, re-connect, and re-organize the committee that serves as your mind.
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