Cracking the Code: Re-programming Your Gut Response to Fear

Articles on Trader Psychology by Rande Howell, Trader Psychologist




Trading exposes hidden flaws in your trading competence without any regard to your ego or past successes.  No matter how much knowledge you have accumulated about trading, that knowledge is so easily laid waste in the heat of the moment when risking capital – and suddenly your confidence disappears.  This is the part that baffles aspiring traders trying to convert their considerable trading knowledge into consistent profitability.

Inexplicably, a determined commitment on your part to plan your trade and trade your plan is swallowed up in a rush of emotion that you never expected to hijack you.  Why does that keep on happening despite your best efforts?  And this is not a rare occurrence, but it occurs repeatedly over a period of years.  You believe that if this problem could be solved, it would change the trajectory of your trading account.

This emotional ambush may result from fear that arises out of the subconscious that corrupts your rational thinking into doing really stupid things.  Or it could be over-confidence that sucks your mind into chasing trades that you should not have chased.  Or it could be an angry reaction to a loss where you want to get back “what is yours”.  However it manifests, you did not see the emotional hijacking coming until you were sucked into it and later spit out.  Yet it was there - if you had only had the eyes to see the problem differently!

What happened to that calm, patient, and disciplined mind and where did it go when you needed it?  This is the mystery that robs you of the potential that trading could hold for you.  It creates a blind spot in your perception that acts as a backdoor into your trading mind and allows sabotage.  But how does it happen when you are working so hard – what are you missing?  And clearly you are missing something – your trading account demonstrates that conclusively.

Survival Instinct -- A Good Thing Gone Bad

If only you could control your emotions like everybody seems to think you should.  Sounds straightforward, doesn’t it?  But it does not work that way.   At some moment in their growth, most traders discover that this is wishful and dangerous thinking.  The traders left standing after the first cull of learning how to trade gain a valuable lesson – there is no FREEDOM FROM emotion, but it is possible is achieve FREEDOM OF emotion. 

What this means to a trader is that emotion is going to trigger when the organism (that is you, the trader) engages uncertainty.  This is because emotions are built to arise any time there is a disruption to a standard sensorial pattern that has already been programmed into brain circuitry.  In particular, uncertainty and risk are perceived as major changes in the status quo of an organism’s (trader’s) comfort zone.

What matters is what emotions show up in response to your experiencing uncertainty and risk.  If you, the trader, are not mindful of your emotional nature, the default emotional programming reacts to uncertainty by triggering to fear (avoidance of biological threat) or aggression (chasing the trade; avenging losses, etc.).  This is the primal emotional programming of the survival instinct.  This is your “first responder” to uncertainty, not your thinking brain.

The survival instinct was programmed into human emotional circuitry during a time when human survival was overflowing with dangerous challenges.  The emotional brain (seat of the survival instinct) developed automatic reactive responses to the all-too-common threats to life as an adaptation to these threats.  Anything that threatened the safety of our ancestors (i.e. early man/woman) automatically triggered the survival instinct.  It is this very adaptation, wired into automatic survival programming that allowed our species to survive.

The problem is that the environment which gave rise to the survival instinct of the emotional brain no longer exists.  Biological dangers no longer lurk behind every bush.  There are no lions, tigers, and bears prowling around in the environment looking for us.  But we have an emotional brain programmed to deal with such dangers when triggered by uncertainty.  This is the mind you bring to trading, whether you like it or not.

That emotional brain learned to equate uncertainty with danger and biological threat – and to react to it long before thinking became involved.  Quite naturally the brain’s response to uncertainty was to control outcome and to maintain safety.  And this is the collision course between the reactive survival instinct of the emotional brain and the need for a probability-based mindset for trade management.  What once was very useful for survival in a dangerous world where split second reaction time was essential to stay alive is now a liability in the modern world.

Reprogram the Survival Response or It Will Break You

The reactions of the survival instinct are automatic when the danger inherent to uncertainty is perceived by the emotional brain.  The trader’s thinking brain is not consulted because all the programming is happening on a subconscious level.  Your thinking mind is literally out of the loop.  Until you can hack the system and reprogram your survival circuitry, you will continue to experience your survival instinct taking control when you engage uncertainty and risk. 

The emotional brain perceives uncertainty as imminent biological threat, as if a saber tooth tiger was fixated on you.  Meanwhile you (the hapless trader) and your thinking brain is posturing to be in a rational state of mind where logic rules.  The minute that real risk is added to the uncertainty, the emotional brain’s survival instinct takes over.  You will have experienced this programmed circuitry many times when emotion trumps reason while trading. 

It is this default programming (once so useful that it was wired into human genetics as a trait to be passed on to the future of the species, but now a stumbling block) that has to be reprogrammed to transform the emotional brain from its survival instinct mode to an emotional brain that tolerates uncertainty and risk – and allows the thinking brain to stay focused on probability of success rather than life or death.

To do that, the trader has to train him- or herself to become comfortable with discomfort by reprogramming the survival instinct of the emotional brain.  That sounds great, but how is that achieved?  (Particularly if the trader is clueless about his/her emotional nature.)

The First Step – Developing Emotional Intelligence or What Makes You Tick

Emotional ignorance is, by far, the biggest impediment to the growth of a trader.  Your biology has been programmed to avoid emotional discomfort.  To the old emotional brain, discomfort means danger – the exact opposite of safety.  Yet, to develop your emotional intelligence, you will need to turn toward your discomfort so that you can examine it.    

To turn toward the agitation caused by engaging your discomfort, you first have to be able to regulate the intensity of an emotion head on, rather than avoiding or denying the emotion.  Traders (like all human beings) are heavily invested in avoiding and denying their uncomfortable emotions, so this is no easy task.  You are actually going against the grain of the way the brain was designed.  Your brain would much rather believe a reassuring lie than to face up to an inconvenient truth. 

Consequently, humans (and traders) constantly practice self-deception to make themselves feel better in the moment, rather than recognize their internal dragons.  This strategy works well if there are no short-term consequences to the fiction that is created and maintained.  In fact, people (and traders) live in these stories, often for a lifetime, without ever being willing to examine themselves.  Remember, to the emotional brain short-term survival is all there is. 

The problem with trading is that your friendly trading account keeps busting you.  The short term strategy of avoiding dealing with your dark side falls apart because your trading account is a disinterested meter of your personal story that you project onto the markets.  It is incapable of buying into your story that explains your life away.  It only measures the competence of that story to extract capital out of the markets – or not.

Your trading account does not cause you distress.  It simply forces you again and again to look into the mirror and notice that the story you tell yourself (and others) about your trading and your performance in trading do not add up.  Your trading account (if you want to become a successful trader) is constantly inviting you to examine the disconnection between knowledge and emotional competence. 

Long term, facing your personal discomfort with managing uncertainty lands you, face to face, with your fears – which (like all traders) you have been avoiding like the plague.  What is revealed by your fears of engaging uncertainty are the beliefs that drive your emotional brain’s response to uncertainty.    The very thing that you have been avoiding because of the emotional discomfort it triggers in you are the maladaptive beliefs that have taken root in the subconscious emotional brain.  These beliefs, that are causing all this discomfort, are about your capacity to manage uncertainty.  The truth is very few traders have mastered the beliefs they bring to bear when they are engaging uncertainty and risk.  They are not the ones you talk about or the stories you would like to believe about yourself.  They are the ones revealed by your trading account.  And they are hidden in plain sight. 

Turning toward the discomfort caused by maladaptive beliefs about your capacity to manage uncertainty, and owning them rather than denying them, is the first step toward reprogramming the emotional brain to be a partner with the thinking brain in order to create a trading mind that engages probability rather than being ruled by your survival instinct.

What Beliefs Are You Really Bringing to the Game?

I have found that deeply held emotional beliefs primarily reveal themselves at the following trading moments:  as the trader prepares to engage uncertainty at entry, managing a trade, and especially exiting a trade.  Here, I want to focus on exiting a trade.  When you lose, what happens in your head?  What attitudes do you hold about losing?  What does losing say about you, your value as a human being, and your power in the world? 

People are so ramped up about “not losing” that taking a loss gets personal very fast.  The story they keep telling themselves is rooted into deeply held beliefs about their value and power as a human being.  Traders buy into a story (or never question it) about having to win.  Yet traders have to become expert losers if they are to become consistently profitable.   And when I poll audiences in my webinars as to what they are thinking as they trade, a full 66% of the traders in the audience report that they are focused on winning the trade or not losing.  The ironic point here is that their mind is focused on something that they do not have control over.  This puts them in a place of powerlessness and, consequently, they train themselves to fear losing.  Their beliefs become self-fulfilling prophesies based on their attempt to control something that they cannot control.  They are hooked into the certainty-based thinking of the emotional brain’s survival instinct.

And what about winning?  What does it reveal about the beliefs that a trader projects upon the markets?  When you exit a trade with a win, how does it make you feel?  Good, I bet.  It seems natural to feel good when you get a win and particularly a string of wins.  Unfortunately what traders do when they win is take personal responsibility for the win.  In doing so, the wins lead to euphoria. (“Look at me!  Look at me!  I won.  Because I won, I’m large and in charge.”)  Do you see the trader equating his/her win with his/her value as a human being?  Way too much ego!  The truth is that the trader simply landed on the right side of probability.  The trader does not make the win happen.  It was only probability.  Yet, the euphoria ignites the trader to fall under the spell of believing that the good times are going to roll on and he/she can make it happen.

Do you see what flaws in perception are being revealed by your trading account when losing or winning?

A Little Homework

I invite you to journal about your winning and losing at exit.  Listen to the conversation in your mind.  Listen for the beliefs attached to winning and losing.  Are you focused on controlling outcome?  Or does your internal dialogue reveal something else, like attempting to control the process.

As you win or lose, listen for the cacophony of voices in your head shouting about your competence and worth as a human being.  Also listen for a small quiet voice beyond the turmoil of an untrained mind.  What does it say?  My Traders State of Mind Coursework is focused on getting at these under-developed parts of your mind.  As you learn to quiet your emotional nature, your survival instinct is not so quick to act.  It is there that the trading mind begins.
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