Articles on Trader Psychology by Rande Howell, Trader Psychologist
There is a Hidden Code that Drives Your Trading
You know the drill –plan your trade; trade your plan. It sounds so simple when you’re in the classroom, discussing trading strategy, or dreaming about your trading success and all that potential money. It makes sense. All you have to do is keep your act together – you can do that, right? Sure, until you are put to the test. Then the money is real, the risk is palatable (and you can feel in your gut), and the outcome is uncertain – and out of your control. This is the critical moment that defines a trader’s performance under pressure. And in the flash of a neuro-synapse nano-second, the modern disciplined mind you brought to this encounter is swept away in a flash flood of ambushing emotions. This is how 95% of all traders choke and then lose money.
In the moment, you may not even know that you have been emotionally hijacked – until the smoke clears. Or you may experience yourself being out of control as you try to manage the trade. You may move from the excitement of the hunt to the near panic of losing control of your trading mind. Either way, the disciplined mind that you planned to trade with collapsed and got over-run by fear or aggression. It is clear after running into this brick wall again and again in your trading that the kind of disciplined mind you imagined would bring success to your trading is not the mind that can produce disciplined performance in the face of both stress and risk. Something is amiss in your calculation of the mind needed for trading success. It’s almost like there is a code you don’t know about.
It's Not the Trading Strategy – It’s the Mind that Executes that Plan
How many times have you thought, “If I could only follow my rules….”? Most experienced traders are consistently profitable in sim trading (as he or she has rules that work in the classroom – when the money doesn’t count). The problem occurs when the trader’s brain experiences the challenges of stress at a level that overwhelms the Thinking Brain (rational thinking). It is like a trip switch that triggers when the pressure builds up to a certain point. Then everything changes. Instead of a mind governed by the rules of a rational mind, other emotions (fear, greed, lust) consume the trading mind. And that renegade mind has a completely different agenda than the rational mind.
This is the code that has to be broken. This is the code that has to be re-programmed for a trader to produce consistent profitability. The mind that wrecks your trading is instinctual and built for survival in the moment once it experiences threat or the excitement of the hunt. This instinctual mind arises from the survival instincts of the emotional brain. This is the missing code. It does not think. It does not reason. Instead, it bypasses thinking, and, through the force of survival emotions, it immediately reacts to stressors in the environment. And it’s fast and hotwired. Once triggered, it requires nano-seconds to activate the fight/flight response into crazy behavior (that’s faster than you can blink an eye). Meanwhile, it takes micro-seconds (an eternity) for the rational brain to get the same message from which the amygdala has already acted. That’s the anatomy of an emotional hijacking leading to the excitement of over-trading or fear-based responses to perceived biological threat.
This is the code you must break to become a disciplined and consistently profitable trader. The problem is that you do not even know it’s going on. You only notice the results (the damage) after the circuitry of the sympathetic nervous system (SNS or fight/flight response) has cooled down so that rational thinking can come back on line. All this is happening in your brain as it responds to heightened stress. And meanwhile, your thinking brain (neo-cortex) is clueless – living in the false assumption that it is in control (another piece of the code you need to crack). This false hope is part of your evolutionary psychology that you still embody from your ancestors’ caveman days. That caveman brain is still alive in you, and it reacts to threat or opportunity instinctually rather than rationally – just as it did back then. To it, nothing has changed. It has to have control and is wired to believe it can control outcome. You are not going to out think your survival instincts. You are not going to force your will upon this aspect of your genetic code.
It sits in the background, forever alert to perceived threats and opportunities. And when activated, it simply blocks communication pathways to your thinking brain – just when you need it most. This is the genetic code you brought with you to trading. It’s not going to go away. It adapted you for survival in a potentially dangerous world, where you had to seize opportunity NOW when it presented itself. Your being blind to this code is not helping your trading. The emotional brain is simply creating limbic learning that is adaptive for survival and then wiring it into the programming code that operates the way you now react to uncertainty and risk. What worked for survival success of the species does not work for managing the probability world of the markets. A different code is needed in today’s world. That’s what you didn’t bring to trade management.
The Problem the Emotional Brain Faces
The emotional brain loathes uncertainty. It sees the randomness of uncertainty as a threat to its existence (death). It does not recognize psychological discomfort because the emotional brain was built long before humans developed a psychological self. It does not think – it emotes. Thinking occurs much later, much like the caboose trails the engine of a train. In the code of consistent profitability, emotional state management comes first, like the engine that drives a train. Thinking follows emotion. Worse yet, your thinking brain simply creates a fiction or a story that supports what your emotional brain (rooted in survival instincts) has already decided.
This is why you are so easily seduced into jumping into ill-advised trades when you have been primed by missing a couple of good set-ups or have taken some losses and are compelled to try to make up for those losses. The greed (or lust) of your emotional brain drives the thinking brain to make it seem that abandoning your trading rules is a good idea in the heat of the moment. Or conversely, after a loss your emotional brain is hesitant to get into a perfectly good set-up because of the fear of loss. What does the thinking brain swamped by fear do? It keeps asking for more confirmation – until the opportunity passes you by.
The emotional brain (that you have been ignoring) is locked into circuits of programming that have been encoded for survival. That is the code (so good for survival) that you have to crack and re-program. That coding determines the quality of thinking you bring to decision making under the pressures of not-knowing (uncertainty) and risk. Until you acknowledge that the emotional brain is driving your responses to uncertainty and risk, you will always be behind the eight ball. Ever wonder why things swerve out of control just when you need to keep your act together? It is because of the fundamental coding of the brain that traders ignore at their own peril.
At the core of this problem is the primitive encoding of adaptive survival responses by the limbic (or emotional) brain to uncertainty and risk under pressure - where the money counts. Those limbic learnings become the implicit (subconscious – out of working awareness) beliefs that drive your responses to the engagement of uncertainty. These hidden beliefs (that you will not acknowledge to yourself) are the ones that have to be brought into the light of awareness, faced, and mastered, or the neuro-circuitry of that belief will continue to drive your performances when under pressure (when the money counts). This is the difference between sim and live trading. There is a reset button (like a video game) when sim trading. The money is real and palpable in live trading. The hidden beliefs are not activated in sim trading, as they are in live trading. As long as you stay clueless, you remain a slave to the programming of your survival instincts (when experiencing the pressure of stress).
Rewriting the Code
There are two primary areas that have to be addressed in order for you to crack and then rewrite the code of your limbic beliefs that drive your trading performances. First is emotional regulation. You have to come to a vastly different understanding of your emotional nature. Emotions are not feelings, nor are they psychological. They are biological action potentials (BAP) that coordinate action between an organism (you, the trader) and the environment (the markets). They overrun psychology. Because they are biological, emotions have a physical signature. If this signature is disrupted, the emotion cannot be maintained. That emotional signature includes the way you breathe and the way you hold tension in your body. This is critical.
Both these aspects of the physicality of an emotion, breathing style and specific muscle tension, are part of the arousal of an emotion. By altering the way you breathe and by relaxing tense muscles, you impact the intensity of an emotion. The key is to manage the intensity of the emotion. An emotion grows (arouses) until it hits a particular threshold. This is the trip switch. Once triggered, the emotion moves into the body and brain as chemistry. This is known as a feeling. It is also what alters the way you think. If you manage the intensity of the emotion, it never has the opportunity to hijack thinking. This is the way an emotional hijacking happens. Not understanding the way an emotion works will set you up for performance failure.
The second aspect of the emotion that has to be addressed to produce a mind capable of consistent profitability is the primitive limbic beliefs behind the engagement of uncertainty. It is really important to move these implicit beliefs (subconscious) into explicit beliefs (in your awareness). Otherwise you are like a blind man boxing…you never see what is hitting you. Recognizing those beliefs is not rocket science, even though traders tend to push them out of active awareness. By pushing them into the shadows of the mind, they become dangerous when you are making decisions under the stress of engaging uncertainty while risking capital. All humans struggle with some combination of these beliefs. If they don’t, then they are deceiving themselves. Which ones drive your engagement of uncertainty?
Adequacy (I’m not competent)
Mattering (Value as a human being = money – which you do not control in trading)
Worth (I have to work hard or I don’t deserve to win)
Scarcity (What I have will be taken away from me)
Powerlessness (I have to be in control – which is impossible in trading)
Turning toward these hidden limbic beliefs is uncomfortable. So most traders (actually human beings) turn a blind eye to their presence. These beliefs are not true about you. They are simply limbic learnings that have been encoded into the current organization of your potential and come from another time and place. However, these limbic learnings (turned subconscious beliefs) take on the power of truth. They stay that way until they are brought into the light of awareness, examined, and re-programmed.
What we discover is that the “I” you think you are is simply a particular organization of the totality of your potential as a human being. The organization of the Self is built around a small set of beliefs that define how you (the current organization of your potential as a Self) engage uncertainty. When your value as a human being is no longer dependent on how you “do” in trading – independent of winning and/or losing – the Self can be reprogrammed. Trading well is not about a focus on winning and losing (which you cannot control); it is about performing in the moment - which you can control. What you control is the mind that you bring into the moment of performance. This is the code that works with managing probability.
This is the code that you must take back from history. And the fundamental beliefs that drive your engagement with uncertainty have to be re-programmed to create a probability-based mind rather than a survival-based mind. You have the capacity to redesign the potential that forms the Self rather than just accept the organization you inherited. You see the evidence of those beliefs in the health of your trading account. The good news and the bad news of this is that it what you do about this is up to you. Which side of your nature do you feed and nurture?
If you are witnessing breakdowns in your performances under pressure, cut the excuses out and get to the beliefs that drive your performances. That’s where the code is. It is highly unlikely that the mind you brought to trading is going to produce consistent profitability. It has to be built. And it’s buildable when you are ready to be honest with yourself. Explore your limbic beliefs that drive your performances under pressure. They are apparent when you examine your trading account. Observing the code of these deeply primitive beliefs regarding your capacity to manage uncertainty is the first step. Refusing to “see” ineffective beliefs is what keeps you stuck in the old survival code. All fear and all aggression is driven by these limbic beliefs. Be the detective that solves the case by finding the truth and mastering it.