Developing the Mind of a Highly Effective Trader

Articles on Trader Psychology by Rande Howell, Trader Psychologist




There is an invisible hole right in the middle of your trading strategy doing damage to your trading potential every day.  And if you could plug that hole, things would be very different.  You would be achieving your dreams of financial success and experiencing personal satisfaction.  The reality, though, is that you have the plan but you cannot seem to trade your plan when the money is real and the losses count.  You try hard and are determined, but the results speak for themselves.  Talk is cheap.  Results speak loudly. After all that effort and expense, the roller coaster ride of trading still dominates your trading account. 

At some moment smart traders conclude that the problem is with the mindset they bring to trading.  Do not take it personally – just about every trader has this same problem.  Nobody wants to get up-close and personal about it, particularly trader trainers selling you the dream, so it remains the elephant in the room that nobody acknowledges.  Consequently, traders are left to their own devices to find the hole in their trading performances and to fix it – but with a brain that absolutely refuses to see itself as the problem.  A daunting task when you see the failure rate of traders trying to become successful.

The Three-Legged Stool of Successful Trading, to the Rescue

Mindset is the last place in the world that you might look to find problems in your trading and your trading system.  Traders acknowledge problems in their trading psychology, but seek the answer to their problems somewhere else other than within. But there are three aspects that have to be combined in order to create the conditions of effective trading.  Without all three working together, the 3-legged stool of successful trading is unbalanced and does not produce the stable conditions needed for success.  Enormous emphasis, money, and time are placed on two of the three…platform and methodology are enormously important aspects of effective trading. But it is the mindset of the trader that drives both platform and methodology.  Without an effective mindset the other two are wasted. 

If you have ever worked with a clunky or inadequate platform, you know the importance of having an efficient platform to execute your trading strategy.  It is necessary.  The same with your trading methodology or the way you effectively manage risk.  Ultimately, trading is about finding reoccurring patterns in an ocean of randomness.  Your methodology has to give you an edge in the management of this randomness.  By being able to discern potential patterns that work to your favor, you are able to extract capital from the markets at a rate higher than the capital you give to the markets.  It is this proven risk management of a solid methodology that gives you a favored potential in terms of outcome.  The problem is that it is rare to find a trader who has the solid mindset that allows him to trade his edge.

And if humans were rational beings, these two elements of trading (platform and methodology) would be enough to provide the necessary advantage in managing reoccurring patterns in a field of randomness.  That is a big “IF”.   Think of it in terms of auto racing.  The track is the platform upon which all cars and drivers compete for success.  The car is the methodology – delivering an edge to the driving team if, and only if, the driver (trader psychology) has the right skill sets to effectively manage his car on that track.  In any given domain of performance there will be a large field of people who know how to operate.  However, in racing, there will only be about 10 or 15 elite performers who can drive that car to success on a consistent basis. The driver makes a huge difference.  So it is a decision of whether you truly want to perform at an elite level – or if you are satisfied with seeing your potential but not doing what it takes to realize it.

So it is with trading.  Platform and methodology are necessary to compete.  But these two are never enough to become an elite performer.  Until the trader learns to be an emotionally disciplined manager of risk (as determined by the success or failure of his trading account) he remains just a player in a crowd of performers who cannot bring a performance edge to their methodology.  They have the know-how to trade in theory, but they do not know how to trade in practice when the money counts.  The defining factor is not what you want to believe about yourself, but that ultimately matters tremendously in trading.  It is about the health of your trading account that determines the development of your potential as a trader.  Your trading account will tell you the truth whether or not you want to hear the news.

This is precisely where traders get and stay stuck.  They keep looking to the technology of trading, the knowledge of trading, for the answers to their performance problems rather than within themselves.  And in doing so, they miss seeing the impact that performance psychology has on trading success.  Just about anyone who has been around a while has figured out platform and methodology.  However, psychologically they cannot handle the pressure of risking capital to uncertain outcomes.  Trading psychology becomes the stumbling block for many a knowledgeable trader, who cannot move from knowledge to performance.  Trading knowledge does not provide an edge unless the performance psychology is rooted in emotional discipline – planning your trade and trading your plan.

The management of emotions is essential for this to occur.  Otherwise every time you engage uncertainty, you force the brain into a vulnerable position – a position in which it could lose.  Vulnerability is dangerous to the emotional brain. It interprets vulnerability as a biological threat – not just psychological discomfort.  This is how the fight/flight response is triggered just when you need a calm disciplined mind for the work of managing uncertainty and risk.  When you trade and do not accept that control is an illusion, you need to recognize that you are throwing the survival based emotional brain back into the dangerous times from which it evolved.  Your trading mind is a set-up for emotional hijacking every time you risk capital with an uncertain future.  The survival instincts of your emotional brain short circuits logic every time, until you retrain the default survival response.

Until you can fix this glitch from your evolutionary past, your thinking brain will always be set up for failure due to being hijacked by the power of survival instincts embedded in your emotional brain.  The question is how do you solve this problem so that reason and logic are available to you as you engage uncertainty and risk?  This is the hole in your trading strategy.

Freedom FROM Emotion vs. Freedom OF Emotion

Emotions are an inescapable reality of trading. There is no “leaving emotions at the door” or “trading without emotions”.  These are dangerous notions that attempt to ignore the power of emotions over your ability to think clearly.  Emotions are ever present.  In fact, the only time that you are not engaged in emotions is when you are dead.  So not having emotions to deal with is not an option.  It is learning how to use emotions intelligently that needs to become your aim.  It is by employing the intelligent use of emotions that you learn how to create the mind that can trade effectively.  This is freedom OF emotion. 

First, ask yourself – What is an emotion?  Go ahead; take a moment and jot down your answer.  What is an emotion to you?  Is it a feeling?  Is it part of your psychology?  Is it touchy-feely?  Whatever you believe an emotion is – write it down.  Now, let’s cut to the chase.  Here is the neuro-biological definition that I use for emotion.  An emotion is a biological action potential that coordinates action between the organism (that’s you the trader) and the environment in which it is embedded (that’s the markets you trade in).  Emotions are caused by changes in status of the environment.  Now think of all those charts you read for entering trades and managing trades – there are lots of changes in status going on all the time.  And each time there is a change in status in the markets, there is a learned emotional response that is triggered in the trader (especially by perceived threats of loss).  By definition, you are going to have to become emotionally intelligent if you are going to become a highly effective trader.  There is no way around it, except through it.

Now go back and compare your definition of emotion to the one that is given here.  Do you see the difference?  This is the hole in your trading strategy and performance.  It’s time to become emotionally intelligent in the use of emotions.

Developing the Mind from Emotion

Notice that the mind you engage uncertainty with comes from an emotional base.  Thinking or perception does not come BEFORE emotion.  Thinking comes AFTER emotion is triggered from the intersection of primitive beliefs learned by the limbic brain as it engages uncertainty.  It is here that the trader must unlearn what his emotional brain has hardwired about its capacity to manage uncertainty on a survival level and learn to train the emotional brain to engage uncertainty from an emotional base of discipline, courage, self-compassion, and impartiality.  This is the emotional cocktail that leads to a mind that can successfully manage probability.  It is not natural, but it can be developed.  (This is not easy to do or there would be a plethora of successful traders.)  It can be learned though.

The default emotional programming of the emotional brain is to trigger to the fight/flight response when uncertainty creates a sense of vulnerability.  That is just a given.  Your biology works that way.  You experience this phenomenon every time you fear entering a trading, or, conversely, jump into a trade that is not a planned trade (impulse trading).  One response is simply fear based while the other is aggression based.  Both are rooted in primitive limbic learnings leading to the fight/flight response.  This is the adapted route for lightening quick responses to perceived danger in the environment (the markets).

First you have to interrupt the default programming that leads to fight/flight – or nothing can change.  Fortunately breathing and muscle tension are actually part of an emotion.  When you alter your breathing and the amount of tension in your muscle groups, you change the course of the emotion.  Fear and anger require stopped breath or shallow and fast breathing to be maintained.  If you train yourself with diaphragmatic breathing as a response to uncertainty (relaxation response), you alter the thinking that comes out of the emotion.

Same with muscle tension.  Muscle tension really is emotional arousal in action.  You are experiencing your body preparing for fleeing or fighting.  If you volitionally relax your muscles, you will interrupt the emotional arousal toward fight/flight.  By doing this, you can create a relaxation response to the stress caused by exposure to uncertainty and risk.  It is a talent you will need to develop into a skill.

This is just first aid though.  What an emotionally intelligent trader is doing is actually creating the mind (rather than reacting to circumstance) that engages uncertainty and risk.  It is created by willfully developing a new limbic learning in response to uncertainty.  Rather than holding on to the illusion that you can control outcome, the emotionally intelligent trader comes to accept that he controls the mind that he brings to the moment of performance.  That mind is rooted in discipline, courage, self-compassion, and impartiality.  This is the emotionally based mind that can manage uncertainty and risk effectively.  It is controlling what it can control – its own self-mastery.

Self-Mastery is the Missing Piece of the Puzzle

Emotional self-mastery gives the trader the edge in performance.  If you have your trading act together, you already have a methodology that provides an edge in the management of probability.  With emotional self-mastery, you bring the mind that has a psychological edge that drives your platform and trading strategy.  This fills the hole in your trading strategy and completes the three legged stool of effective trading.  Left brain logic and right brain emotion are now in partnership with one another.  The hole has become an edge.  It does require evolving the brain and mind you brought to trading and people (and traders) are typically resistant to change.  Yet the potential is there if you are willing to face your fear of change and claim a new destiny.

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