Breaking the Habit of Over-Trading: Learning to Stick to Your Plan

Articles on Trader Psychology by Rande Howell, Trader Psychologist




"Every day I start with the resolve to have the discipline to trade my plan.  I really believe I am going to do it this  time.  I am prepared.  And everything goes fine for a while.   Then something happens.  Before I know it, I’m over-trading.  And making trades, that in retrospect, I have no business in. The problem is that I don’t see it coming. But, there I am again, trading outside of my plan.  I don’t understand why I keep on falling into the same bad habits again and again."

What Causes Over-trading?

Over-trading, as opposed to revenge trading, is grounded in a bias to take action so the trader can make things happen. And, outside of trading, this ingrained behavioral tendency to take action often proves a successful adaptation. It seems so “right” that the urgency is rarely noticed until the damage has been done. Rarely does the trader see that this trait is a flawed strategy in trading.  

It is so familiar, so ubiquitous, that it is not noticed and is literally off the trader’s radar screen.  In the vignette above, the impulse to act outside of plan seems to come out of nowhere.  But that’s not the way it happens. The bias to act, to chase the trade, is not viewed as a dangerous development in the way the trader is “seeing” his environment.  After all, he thinks, I am there to trade and get the ball rolling.  Wrong.

Over-trading is rooted in a fear of missing out on potential profits.  It is that unaddressed fear that torpedoes the trader’s mind.  Damage is done because the trader, as a hunter, moves from a mindset that patiently waits for the prey (the set up) to come to him to a hunter who begins to stalk his prey (looking for opportunity outside of his rules).  It is this subtle shift that the trader in the vignette above doesn’t see influencing his perception.

Acting Out of Boredom Rather than Patience

Setting still and waiting invites boredom into a mind accustomed to taking action and doing something to make things happen.  Boredom, in the alpha’s mind, is the enemy of getting things done. Actively doing something, in the short term, gets the trader out of the discomfort of watching trades (and money) passing him/her by as he just sits there like a bump on a log.  It is this unexamined urgency, in the context of trading, which makes the trader susceptible to act on impulse rather than reason. 

It feels good to be doing something, rather than just sitting there getting more bored as time goes on.   Worst, as you just “sit there” doing nothing, negative thoughts have a ways of creeping into your mind creating un-ease.  Then, coupled to the desire to take action is also the need to escape the uneasiness of “just sitting there”.  This is a perfect storm for over-trading – the urgency to seize opportunity meets the need to escape boredom.

Busyness vs. Effective Action

Besides the urgency to be trading (doing something) to make money, jumping into a trade helps the trader escape the boredom of sitting on his hands waiting for something to come to you.  Why not go after it?  You can make it happen – for you always have in other endeavors.  And as the logic goes – if you don’t do anything, nothing is going to happen.

So, to the action-oriented brain of an alpha-leaning trader, there is a choice here:  While you are supposed to be trading, you can either take action and feel empowered (because you’re doing something) or you can sit alone with your thoughts and start feeling uneasy as you just sit there waiting – wasting your time when you could have been doing something to seize opportunity.

Much of our active culture is based on taking action, making things happen, or consumed by maintaining busyness with activity.  This aspect is at the core of much of the success thinking and principles that are taught in personal or professional development outside of trading. So it is natural for a person who has experienced past success in business or a corporate career (by making things happen) to attempt to generalize what created success then to the environment of trading.  On the surface it makes sense.  It makes a person feel empowered to make things happen.  This is the mind that the trader brings to trading – and it is not going to produce success in trading.

The worlds of business and corporate life have very different rules for success than trading.  For most, the act of pushing an agenda forward proves to be a powerful strategy for success in business.  But this same mentality, when applied to trading, does not produce success.  That is because the work of trading is not busyness – it is patience.  It’s not that the old paradigm of pushing the agenda and making things happen is wrong.  It’s just that what worked in one environment does not work in the world of trading.  It is the difference between a stalking hunter and an ambush hunter.  The success of either depends on its effectiveness in a given environment.

Creating a Train Wreck in the World of Trading

First, let’s find out what’s behind the biological patterning of impulsive over-trading before moving on to the mind.  Dopamine and testosterone produce the euphoria (the feeling good or the feeling of power) that leads the brain and mind to over-confidence and mindless trading.  Every time there is success from taking action in the face of uncertainty, the reward center of the brain gives the system a little squirt of dopamine.  This shot of dopamine makes us feel really, really good. 

A close relative of the neuro-transmitter dopamine is the drug called cocaine.  So it’s pretty easy to see how the reward system works.  If fact, each time you make things happen, your brain gets another dose of dopamine.  Before you know it, the brain learns that taking action and making things happen makes the whole system feel good.  The behavioral tendency is then wired, based on the reward of dopamine, into a habitual response, particularly when confronted by uncertainty.

So on a biological level, two things are converging to create over-trading.  First, for many traders the taking action in the short term (making things happen) is already a habituated circuit that produces a dopamine fix – a high reward for acting rather than sitting on your hands.  It feels good to be doing something rather than “doing” nothing. Boredom, associated with patience, is averted because it was not trained into default programming to deal with the uneasiness created by uncertainty and not knowing what the outcome will be.  What is left is an “itch” to act.

Second, an untrained brain/mind gets agitated when it is asked to sit still while simultaneously being exposed to the ambiguity of uncertainty.  Suddenly, a new “itch” arises.  With a brewing need for excitement (dopamine dependence) and a growing sense of uncertainty and capacity to control outcome, stress begins to build up (cortisol).  And the brain/mind, unless well trained, will want to jump out of the growing uneasiness of just watching things go by without doing anything.

The Double Whammy of the Excitement of the Chase Meets Escaping Boredom

The perfect storm of overtrading only needs one more thing – testosterone.  Testosterone is associated with risk-taking.  So the untrained brain/mind is faced with a conundrum.  It can stay in the growing stress of doing nothing, or it can risk taking action.  In its drive to feel the excitement of the hunt (making things happen) and the strong motivation to escape the uneasiness of boredom, the brain/mind lowers its capacity to appraise risk by supplying testosterone. 

Then, risk is not as important a consideration and the excitement of the chase (making things happen) creates a thirst to act.  The discomfort of patiently engaging the ambiguity is averted.  And confidence in patiently trading your plan has been replaced by the over-confidence of needing to make things happen.  This is the perfect storm of over-trading.

Biology and Beliefs Meet

The chemistry of over-trading happens as a result of the beliefs you bring to the management of uncertainty as it excites the flight/flight syndrome.  Traders often profess to have certain beliefs that drive their trading.  The distance between the veracity of your professed beliefs and the hidden beliefs that drive your performance are revealed by examining your trading account (or by seeing where you stack up to the benchmark by which you are measured as a proprietary trader).

Traders often deceive themselves by professing beliefs that fly out the window when real capital is put at risk.  But your trading account is the beacon of self-honesty.  Your trading account will reflect the effectiveness of your real beliefs that drive your performance.  If you are seeking to retrain the brain/mind for patient, disciplined trading, this is where to look.

In over-trading, there is a need to control outcome by force of will (making things happen).  It is the need to control outcome that is at odds with a successful trading mind.  Control over outcome is an illusion (albeit a persistent one) that has to be embraced in the world of trading where outcome is always uncertain.  Becoming comfortable with and accepting uncertainty of outcome at the level of your trading account is the key element missing in a trader’s habit of over-trading.

The need to be in control over outcome, deeply embedded in our evolutionary history, is simply dangerous to hold onto in trading.  This need, no matter how successful in the past, simply does not generalize to trading.  In trading, the need for control of the alpha personality is rooted in a hidden sense of inadequacy, of not really mattering unless you’re a winner, a sense of having to prove your worth, and always a sense of powerlessness over outcome.

The Paradigm Shift as Difference Maker

It is when the alpha trader is faced with his powerlessness over uncertainty of outcome that the distress happens and the ramping up of chemistry leading to overtrading begins.  The markets will always call his/her bluff.  The opportunity to separate performance as a measure of your value and a deeper sense of worth as a human being opens up.  Life, the markets, and any given trade were always uncertain.  And you could never control the outcome.

However, what the evolving trader does discover is that, once he gives up on trying to control outcome, he can learn to control the one thing that he can truly control.  The trader can control the mind that he brings to the performance of trading.  By doing that, probability is on his side.  This is the elusive edge that the vast majority of traders never understand.  The paradox is that the trader does not “work” to make things happen.  Instead, he patiently waits for opportunity to come to him.

The urge to chase opportunity and the need to escape boredom are simply artifacts of an old world view that is no longer relevant in the trader’s world.

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