Articles on Trader Psychology by Rande Howell, Trader Psychologist
Finding the Blind Spot Sabotaging Your Potential
You know it’s possible. You feel it inside you. Every day you see the potential in the markets just waiting to be tapped. And you know you can do it. But even with your best effort, you consistently face the realization that achieving your trading potential is far more elusive than you initially figured. It’s up and then down. You think you finally have your act together – then you give it all back and more. Consequently, time and capital drag on without achieving the kind of success you know is possible. What are you missing that could be the defining difference in your trading or active investing?
No one warned you about the mindset problem you were going to run into when trading or active investing. Or if you were warned, you were not listening with ears that could hear the truth. You assumed that you had trading psychology down – that it was simply not a problem area for you. You wanted to believe that success in trading could be mastered by hard work, good education, and a winning attitude. And so once you had the knowledge and figured out trading, you were going to make things happen. And, like so many before you, you dismissed the need to develop your mindset for the unique conditions of trading.
At first, you believed that your inability to keep a level head under the pressures of trading was just part of the learning curve. You were going to get through it – you had confidence in your abilities and your knowledge of trading. It was just a matter of time. And with your winner’s attitude firmly in control of your mind, you knew you could do it. Then the weeks, months, and years of that learning curve kept unfolding into the future – meanwhile your results didn’t show the progress you were seeking. At some moment you came to realize (perhaps not admitting it to anyone else) that there was something fundamentally wrong with the way you were interacting with the markets.
Trading performance did not produce consistently profitable results. You still came unhinged at exactly the wrong moments. If you could only follow your rules, everything would be fine. But you kept breaking your rules without even realizing it. Damage was done without your ever knowing it – until it was too late. And you were left with the trader’s refrain – what was I thinking? Out of nowhere the self-sabotage bug struck again. Your results stayed inconsistent despite all the knowledge you had acquired and your desire to win.
Does this sound familiar? It should. Traders at all levels stay limited by a glass ceiling that limits the potential of their trading all the time. And it does not go away with all the “winning mindset” stuff you throw at it. If the power is within you to build a mind for trading, what is it you are missing? The questions we want to address here are: What is the Glass Ceiling that Limits Potential? How Do I Break Though the Glass Ceiling and Reach Greater Potential? Where Is this Potential Found and How Do I Develop It?
Re-examining Success and Winning in Trading
Success in trading requires a completely different mindset than the one used outside of trading in other areas of your life. At some point in their journey into trading, people discover that the laws of success, so useful in other endeavors, do not apply to trading. A very different kind of success mind is required for trading. Visualizing success, a positive mental attitude, persistence, force of will, and a focus on winning, (so central to a winning mindset) do not generalize to trading well. If they work so well in other areas of your life, why don’t they work in trading?
The answer is the illusion of control. Your brain, inherited from our Caveman ancestors, was built to control your environment and to control outcome in a dangerous world that included saber toothed tigers, big bears, and potential starvation (conditions that a trader never experiences in today’s world). Short term survival was the name of the game. So the human brain adapted to making decisions lightning fast for your immediate survival. Any and all challenges were life threatening, rather than psychologically uncomfortable. When successful solutions to short term survival problems were found, they were locked into automatic response patterns (called emotions) that did not require thinking as part of the solution. Thinking required too much time. And when thinking finally did show up, it simply supported what the emotional brain had already decided. Responses to perceived threats had to be faster than thinking allowed…good for survival; bad for the probability management needed for an effective trading mind.
This adaptive response got rooted in emotions that by-passed thinking - called your survival instincts. And it worked in those pre-historic times as an advantage for your survival. And the survival instincts became locked in as the default programming that drives short term survival success, particularly under stress. This is very good news for the survival of our species before the advent of modern times. It is also the bane of every trader trying to get control over his emotional responses to uncertainty and risk. And it is an inescapable need for trader development.
Why? The emotional brain, where all this survival instinct programming is situated, does not distinguish between biological threat and psychological discomfort. To it, all uncertainty is dangerous because it is no longer in control. And not being in control of outcome in a dangerous world means only one thing – a threat to biological existence. The survival instincts of the emotional brain trigger and hijack the thinking brain in nanoseconds. The brain reacts for short term survival rather than for long term benefit. You face this dilemma every day as a trader.
Translation: When you hesitate at entry, your emotional brain celebrates a victory. It has averted danger. If you cannot get into the trade, then you don’t have the risk of losing the trade. This is success to the survival instincts of the emotional brain. Or if you have been managing a trade and it has been going sideways on you, spending most of its time against you, your emotional brain sees this as an attack with its very survival at stake. To it, you are in eminent life-threatening danger. Then the trade crosses the threshold into positive territory – how do you think your emotional brain interprets this?
It sees it as an opportunity to jump to safety and survival. You, as a trader, see this situation as leaving a bunch of money on the table because of the fear of missing out. But to the emotional brain – this is a victory that will reinforce the patterned behavior. The survival needs of the emotional brain and the probability management needs of the thinking brain are at odds with one another. AND THE EMOTIONAL BRAIN WINS EVERY TIME. And if you do not know how to calm the emotional brain’s tendency to act from its survival instincts, it will win every time BECAUSE THE EMOTIONAL BRAIN GOVERNS THE KIND OF THINKING YOUR RATIONAL BRAIN IS CAPABLE OF. This problem in the relationship between the emotional brain and the thinking brain has to be solved if the trader is to develop a brain/mind that can trade effectively.
All thinking is emotional state dependent. Until you understand how to work with the emotional brain (Emotional Intelligence), the mind you bring to trading will always be inadequate for the needs of trading.
The First Task – Using Your Emotional Brain to Create the Trading Mind
Your emotional brain determines the quality of thinking you are capable of under stress. And trading or active investing (anything that involves uncertainty and risk) triggers stress reactions that will activate the survival instincts of the emotional brain. Unless you learn how to work with the emotional brain so it distinguishes between psychological stress and biological threat, you are stuck with the short term bias of your survival instincts. More than that though, the emotional brain can be trained to respond very differently to uncertainty in training.
The emotional brain is your partner (whether you like it or not) and not your adversary. You will have to learn how to regulate emotions so that you can control the intensity of your emotions. Without this skill, you will continue to experience emotional hijackings as you try to manhandle emotions (which is not possible long term). And you will have to accept that there is no such thing as FREEDOM FROM EMOTION. But as you gain skill in training the emotional brain, you discover that there is FREEDOM OF EMOTION.
You do not get to choose whether you trigger to emotions as you engage uncertainty and risk. However, you can develop the skill of WHICH emotions you can call forward into your working mind to engage uncertainty and risk. This is a revelation if you are trying to figure out how to create a mind that trades effectively. The default programming in your emotional brain, forged through evolution and time, pairs fight/flight (aggression/fear) to the experience of uncertainty. Remember, left to its own devices, the emotional brain interprets uncertainty as a biological threat to which it reacts. This is what has you stuck in self-limiting trading patterns. You experience this default programing every day as you trade when your mind is hijacked by the emotional brain and, consequently, you do not follow your rules. Fortunately there is another way.
In the courses that I teach, traders learn how to use their FREEDOM OF EMOTION possibility to bring forward a different set of emotions to create the thinking mind that engages uncertainty. This is where the trader learns to claim the power within the Self. Once regulated, the emotional brain can be taught to respond to uncertainty, not through the reactive program of fight/flight, but through new emotional design.
The emotional brain learned over the passage of time and generations to associate uncertainty (remember it was indeed a dangerous world where uncertainty more than likely meant a threat to survival) with aggression and/or fear, or what we call fight/flight. Because the solution worked, it was wired into habit and through the generations it became a genetic predisposition inherited as primal, instinctual programming. You experience this primitive short term “fix” gone permanent every time you experience fear, anger, greed, or an impulse to chase in your trading.
The problem is that the world for which the solution was created does not exist anymore. However the emotional brain (without retraining) does not know that the old dangerous world it was designed for is not the current world of trading. It simply projects its survival instinct biases onto the world of the markets as environment. And when uncertainty and risk show up together, the old survival brain kicks in as if you still live back in the dangerous world of our caveman ancestors. And you know what happens then – another emotional hijacking.
This is the default programming that you arrive to trading with. It does not mean you are stuck with it. It can be retrained. Remember, the original association of the emotions of aggression and fear to uncertainty was a learned response. Through repeated use and genetic transmission it became a trait that is wired into genetic predisposition. At this point it became emotionally reactive. And that’s not good for trading or anyone who works with uncertainty and risk together. Fortunately for human beings, the wiring can be re-adapted by design.
Rewiring Your Response to Uncertainty
The brain is composed of a number of emotional programs beyond aggression or anger and fear-based emotions. Among these are the emotional programs (you could call them emotions) of discipline, courage, self-compassion, and impartiality. It is these four, working together, that create an emotional cocktail that gives rise to a mind that is suitable for effectively managing the probability of uncertainty and risk. These are emotional programs that live in all human beings, but they are not the ones that were originally successful for managing uncertainty and risk short term in the dangerous world of our caveman ancestors. So they were not selected to be the programmed emotional response to the danger of uncertainty back then.
However they are still resident emotional programs in the brain and are available and accessible. And they can be associated with various changes in the status of the environment. So, you can re-train your brain’s response to the default reactive programming of encountering uncertainty and risk. The design work to do this is actually pulling up the emotional programs as you are experiencing uncertainty and risk and maintaining them through the encounter. As they produce long term success in working with uncertainty, the association is built between uncertainty and the new emotions as a successful solution to engaging uncertainty. And the neurons that fire together, wire together. Over time, you develop the new neural circuit that pairs uncertainty with the emotional cocktail of discipline, courage, self-compassion, and impartiality.
In our work with traders and active investors, I use a highly specialized process to create this new association between uncertainty and the mind that engages probability. It starts with emotional intelligence – relearning how emotions work and how to use them. With this new knowledge you learn how to regulate the old reactive emotional patterns that you came to trading with so that they don’t hijack your trading mind. Then you learn mindfulness, where you develop an observing self that becomes the watcher of thought and emotion. This is a powerful step.
In learning mindfulness you discover that you and your thoughts are not the same. Even you and your beliefs are not the same. There is always awareness that can observe thoughts and beliefs non-judgmentally. This is where you truly begin to claim the power within yourself. Rather than staying stuck in the default survival programming you inherited from nature and adaptation, you become the designer of the mind that engages uncertainty. The talent is already within you. It is a matter of your standing up and claiming your potential from the survival programming you got stuck with and applying that potential to the mind built for managing uncertainty. The need for this change is essential. Your brain/mind was built for another time and place – not for the rigors of managing the uncertainty and risk of trading.
No amount of talking and platitudes will solve the problem. The talent is there, latent, waiting to be tapped and developed. The need is there. The mind you brought to trading simply is not up for the job. It’s nothing personal – it is just the reality of the situation. The key questions are: Do you have the eyes to see this fork in the road? And, how do you respond? Do you stay stuck in the past, or are you ready to claim the potential living within you?