Developing Your Capacity to Actually Follow Your Rules: Using Mindfulness to Build an Effective Trading Psychology

Articles on Trader Psychology by Rande Howell, Trader Psychologist




“Why can’t I just follow my rules?  That would make all the difference in the world.”

Theory and practice are very different in trading and active investing.  In theory, success is just a numbers game when you follow your rules.  This was the dream you bought into.  It’s so straight forward in theory.  All you have to do is follow your rules, that’s all.  Your plan works when you work the plan.  It is simple enough.  All you have to do is “do it”.  This is the dream you bought into and believe passionately.  Logically you know that there will be losses – it’s just part of the game.  No big deal and, in theory, you’re ready for it.  Rationally you keep telling yourself this – with your rules you have an edge.  And that’s where the magic is. You know this to be true – you can smell the success, almost touch it.  Just follow your rules.  

But in practice, things fall apart without you even noticing all the red flags unfurling right in front of your unseeing eyes.  At the start, you feel confident because you’re in control.  You and your plan are ready.  Then doubt or over-confidence creep unnoticed into the mind.  You take a hit…but you can handle that.  Then another.  Things start rolling now. The Positive Mental Attitude (PMA) pumping up your trading psychology comes crashing down.  In the blink of an eye your disciplined mind that was following your rules is ambushed.  In its place are fear, chaos, impulsiveness, and aggression.  You come unglued without even noticing it until it’s too late.  All that work is blown up yet again.  Where did the rational mind go that was going to follow its trading plan rules?  And what about that substantial loss you just sustained?  The wind just got knocked out of you.  The emotional discipline to unite theory and practice disappeared into the dark night of your trading soul.  Again.

The Emotional Brain Overwhelms Rational Thinking

If you are a highly motivated trader or active investor, trading knowledge is not the problem.  You will have a methodology and a platform that provide an edge.  What is missing is the performance psychology that uses your knowledge of trading and platform while risking capital.  Specifically, the trader must focus on the implicit beliefs (out of conscious awareness) that drive the trader’s performance when engaging uncertainty (with capital at risk) as measured by the health of your trading or investment account.  If you listen closely to the chatter in the mind when challenged by uncertainty, your trading account will reveal the hidden beliefs that drive your performance. 

Everybody wants to be a winner and are perplexed why they are not winning, considering all the effort that is invested into optimizing their trading business.  If effort were the price for being consistently profitable, there would be many, many more successful traders.   Yet between theory and practice is a great shake-out.  And that gap between theory and practice is the six inches between your ears – your mindset…specifically, the beliefs embedded into the emotional brain that drive performance under pressure.  Not the beliefs you talk about, but the ones that are revealed in the midst of performance. These beliefs are actually learnings that were once successful for survival’s sake and were, therefore, habituated into the neural circuitry. You are not conscious of them, but they shape the world you see.  And they are called your survival instincts.

These beliefs are not rational and do not respond to reason.  They are far more primitive than that.  Limbic beliefs were there long before the rational mind evolved.  Consequently, the highly coveted rational part of the brain and mind SERVES the emotional brain.  Emotional beliefs, below conscious threshold, drive the rationalizing mind.  This is a big problem for traders because they are projecting these beliefs onto the markets every day.  And they are revealed in your performances under pressure.  The important point is that reason serves them because they are the survival instincts.  Literally, they are activated when the brain is exposed to uncertainty, particularly when tangible risk is involved. 

To the survival beliefs of the emotional brain, all uncertainty is a biological risk to survival.  And the emotional brain cannot tell the difference between biological threat to life and psychological discomfort.  To it, uncertainty (not being able to control outcome) is a threat to survival – not just a threat to the capital you have at risk on any given position.  Every time you risk capital in the markets you are invariably activating this primitive survival instinct that will compromise logical thinking unless you have rewired the default survival programming. You may experience this phenomenon when you attempt to enter a trade where you are risking capital and back off, even though it’s a valid set up.  You may experience this triggering of your survival instincts when a trade goes against you and you feel the sudden rush of adrenaline and an accelerating pulse.  Or you may feel it when you experience FOMO (fear of missing out) that causes you to leave money on the table to protect a skinny profit – or in jumping into a trade because you do not want to miss the anticipated move (like you did last time).     

Access to all that rational knowledge (all that theory) that you possess is washed away as the fight/flight response to uncertainty is activated and you are unceremoniously hurled into emotional thinking.  This is the problem that nobody seems to want to talk about, but EVERYBODY is experiencing.  Until you are willing to change the default emotional learning (the beliefs that drive your performance in a challenging environment) about your capacity to manage uncertainty (as defined by your trading account), you will stay mired in the slip-sliding gap between theory and practice.  Until you can consistently use your theory effectively in the practice of actually risking capital, you will stay on the roller coaster ride of up and down performance.  To change that you will need to get at the unconscious beliefs that are holding back your management of uncertainty.  And that is a scary thought to the survival instincts of the brain.  It would rather see you stuck in an unprofitable pattern that it knows than to risk changing.  (The demon you know is better than the demon you might meet if you were to change.)

So traders stay stuck in under-achieving performances for years on end.  They can talk the talk of trading, but they are not talking about the equity growth of their trading account.  They can smell the tantalizing scent of success at a distance, but never quite get there in the winner’s circle.  Why? Because they never step back out of the familiar and examine the beliefs that drive the show.  People are not willing to change the way the brain and mind operate when engaging uncertainty.  Instead of changing their performance beliefs, they keep tinkering with their systems.  But what would happen if they were willing to change?

Bringing the Tool of Mindfulness to Your Trading Performance

In mindfulness the trader starts to notice, to examine, what he or she experiences.  He or she just does not let the experience drift on by.  It is examined like a detective studying a criminal case.  Suddenly there is a connection between body, brain, emotion, beliefs, mind and performance.  An order of separation begins to develop between the thoughts and feelings running through your head and the observer noticing them.  The chatter of thoughts in your head is not just “your” thoughts.  You will find very self-limiting voices in your mind that are counter to trading success.  This is the beginning of awakening the Observer of the Self – mindfulness.  Instead of the same-old, same-old sliding past the trader without ever really questioning, the trader examines these voices the way an anthropologist would explore the way a culture constructs the reality they live in.  This is where change begins.

A startling discovery is made.  You and your thoughts are not the same.  Even more to the point – “you” are not having thoughts; they are having you.  You have been adrift in a river of thoughts, beliefs, biases, and assumptions that has created the reality you live in – and trade in.  You have been asleep at the wheel, not even noticing the map that you have been using to direct you.  And waking up, you discover that it is not a good map.  You have not chosen how to think, access, and emote.  Instead you have fallen into a narrative that defines you.  But “you” are not that narrative.  But never seeing the narrative in which you are stuck, you assume that the narrative is actually you.  No, it is only one possible organization of a Self among a much larger potential.  This has great implications for the mind that you bring to the act of risking capital in the midst of uncertainty.  If you were an impartial detective watching yourself make trade decisions under stress, what would this detective say about the pattern of your decision making?  This is the narrative that needs to be re-programmed for effective management of the uncertainty found in trading.

 How Do You Unite Theory and Practice?

You are not stuck in one particular way of perceiving and acting in the world.  This is the powerful possibility that Mindfulness opens up for the trader who is seeking to train the mind for the rigors of working in the environment of the markets.  In applying Mindfulness, with its examining perspective, the possibility of designing and building a mind for trading awakens.  Instead of trying to force a brain and mind built by nature for short-term survival (trying to control outcome, predict outcome, and the need to be “right”) – you can redesign it.

At the core of this redesign effort is getting at implicit beliefs that are outside of your working awareness, but which impact your performances, and make them explicit (bringing them into working awareness) so they can be examined.  The emotional brain simply was solving an adaptive problem when it fell into the beliefs that currently drive your performances in the face of uncertainty.  If your emotional brain found short-term success acting from a particular belief, it was simply wired into familiar pattern and became “you”.  It is not a fixed trait.  It is only one organization of a Self within a vast potential – if you awaken to this potential. Your current mode of reacting to uncertainty is adaptive.  Your emotional brain adapted you to this way of solving how you engage uncertainty at another time, place, and circumstance. 

What was successful then (and wired into pattern) is rarely effective for trading.  The old emotional learning was based on controlling outcome (at least the illusion of control), predicting pattern, and being right (or not being wrong).  That emotional learning will not work in trading.  Trading and active investing demands that you give up the illusion of control to become effective.  This condition is what makes trading so hard for the vast majority of hard working traders to find success.  You have to change the beliefs that you project upon the markets.  So the emotional beliefs that drive performance in the midst of uncertainty have to change – there is no way around this condition.  The new emotional learnings lead to beliefs where you control the mind that you bring to the moment of performance.  You cannot control outcome.  You never could. It was only an illusion busted by the power of the markets over your mind.  But being in charge of the mind you bring to the engagement of uncertainty – that’s a very real tangible asset that you can develop. 

Much like the professional golfer at a big money tournament, where he cannot control the weather or other player’s games, you have to focus on what you can control - the mind you bring to performance.  And it will unite theory and practice into a force that engages uncertainty very differently than pretending to control what you cannot control.   This is the humble step toward the necessary self-mastery.  It is the edge that you can develop by regulating your emotional nature and becoming mindful of the mind you bring to performance.  By doing so, you will notice that you follow your rules undaunted by the emotional storms around you.  A very new trading narrative has arisen and taken ahold of your trading mind.  You have adapted your survival brain and mind into the probability based mind need for success in trading.
Back to blog