Discovering the Historical Narrative that Sabotages Your Trading Mind

Articles on Trader Psychology by Rande Howell, Trader Psychologist




“Man is not a rational animal; he is a rationalizing animal.”

                                                                                   Robert A. Heinlein


Jeff had been here before.  After working real hard, he had finally gotten funded, traded well for a while, and then it all fell apart – again.  And he lost the funding he had worked so hard to get.  He had cycled through this pattern a couple of times over the last several years so he was no stranger to it.  Each time, he thought he had it beaten. Jeff would double down on his effort, work real hard at getting his head back together, and trade confidently. 

Then “it”, ever so subtly, would creep back into his trading and, before he knew it, he started making mistakes he knew better than to make.  Then his confidence would erode.  And he would give back his profits.  It was baffling.  The problem is that Jeff did not know what “it” was.  He knew something was going on.  Somehow a confident, disciplined trader had degraded into a frustrated inconsistent performer.  But when he looked for the reasons for his collapses, he just could not see the seeds of his own destruction before his trading became derailed. 

Yes, he was baffled and a little more than just frustrated with himself.  Jeff had substantial time, energy, and money invested into this thing.  What he had envisioned as a learning curve to master several years ago seemed more like a roller coaster ride guaranteed to have few ups and too many downs.  Why couldn’t Jeff figure the problem (“it”) out?

Learning to See as the World through New Eyes

The situation with Jeff (and many, many other traders) is that they see through eyes that are incapable of seeing and understanding the problem with their performances in trading.  Their point of reference (their historical narrative) actually renders them blind to see what is right in front of their face.  They literally cannot see what they cannot see – not for lack of effort, but for lack of understanding the brain (as an adaptive organ) and the mind that emerges out of the brain.  It is this missing understanding that is called Emotional Intelligence (EI).  And it is Jeff’s EI quotient that inhibits him from being able to define the elusive “it” (the problem) that he has in his trading.  He is not seeing that he is locked into a historical narrative that primes him for repeating self-limiting patterns.

How can Jeff begin to look at his situation differently so that he can better understand his predicament in order to solve it?  First, let’s take a look at the obvious.  He recognizes a reoccurring pattern of sabotage in his trading.  He works hard, earns a funded account, trades well for a while, and then relapses into poor trading habits without noticing how he got there.  What does this have to do with Emotional Intelligence?  A lot.

An organism (that would be Jeff…and you) operating in an environment (that would be the markets you engage on a routine basis) is seeking to solve problems that it encounters in its world (that’s Jeff and you going about the business of trading in the markets).  And when this organism (or trader) finds a successful solution for dealing with a problem in that environment, that solution is quickly wired into pattern so that it becomes habitual.  This allows the trader to automatically trigger to the successful solution without the timely effort of re-thinking about the problem every time it shows up.  This is called adaptation. 

Then, as habituation occurs, the pattern becomes so familiar that the trader’s brain (remember it is an adaptive organ) pushes the problem-solving-solution pattern out of working awareness.  Remember the brain has to process a staggering number of computations and would become bogged down if it had to keep every pattern in working awareness.  This simply is an evolutionary short cut that has proved successful and become part of your functioning brain and mind. 

Now anytime that Jeff (or you) encounters a similar problem or circumstance in the trading environment, the pattern automatically triggers and takes care of the problem.  (This is the power of a historical narrative.)  Neither you, nor Jeff, have to think about it.  It just happens without your ever knowing it.  The brain has adapted you (the organism) to respond to various environmental pressures automatically and without thinking. The rub is that the pattern-making process is designed for short term survival success and works on an instinctual level, well below a conscious threshold.

This process acts like a self-fulfilling prophesy, where you are engaging the world from emotional programs that have a life of their own.  Part of it is purely biological adaptation, but another part is when the brain creates the mind – and suddenly an explanation is created to make sense out of what the emotional brain has decided.  All this is happening on automatically without your conscious participation.  Jeff, and you, fall into this explanation without ever examining it.  It is like the air we breathe.  It is so familiar, so ubiquitous, that you do not see that it is there.  Yet the historical narrative, created as an adaptive response to environmental factors, begins to create your experience and shape the world you live in.

Now back to Jeff’s self-limiting pattern.  Learning from Emotional Intelligence theory about how and why the brain creates patterns and locks them in without your awareness, Jeff is simply living in a programmed pattern set up for another time and circumstance.  The modus operandi of the pattern was short-term survival without regard for long-term benefit.  (This would be a probability-based solution, which the brain is not built for.)  Jeff has a deeply embedded pattern that is highly resistant to change that is driving the way he interacts with the markets and circumstance.

It was a highly successful pattern in another time and another place that has taken on a life of its own.  Therefore it has become Jeff’s default programming – this is his historical narrative.  Unfortunately, as useful as it may have been in the past to ensure survival in the moment (what your brain is designed to do), it is no longer useful in the probability-based world of trading.  Jeff’s brain (and yours also) has created a perceptual map of its old world (a historical narrative) and insists upon continuing to project it upon the world of trading.  Until Jeff is able to disrupt the default survival programming of his brain, he is stuck in this boom and bust cycle of his historical narrative that has epitomized his trading for years.

All his hard work; All his will power; All his determination – cannot force the life pattern in which he is stuck to change.  But as he comes to understand pattern and emotions, he begins to see what he has been blind to.  He is starting to observe his biology, brain, emotion, and mind as a working whole, rather than as disconnected parts.

The Mind on Emotions

Patterns are about automatic responses to environmental pressures – and emotions drive those automatic responses.  From an Emotional Intelligence perspective emotions are very different than the way people think about emotions.  First, emotions are not psychological; they are biological and take over psychology and thinking.  They trigger when there are changes in the environment (markets) that affect the organism (Jeff or you).  Human beings (Jeff and you) are biased to negatively assess changes in their environment because this was a very successful strategy that is now wired into humans as traits.  (When was the last time you turned on your favorite news channel and found good news?).  Emotions will move the organism (you and Jeff) into action AND will influence the kind of thinking of which you are capable. (Just think of the fear of loss that freezes your hand on the mouse or the anger that drives you to get revenge, or the euphoria that breeds over-confidence.)

Traders have made emotions their enemy.  And Jeff (like so many other traders) tried to control his emotions (thinking that they were the enemy) and tried to trade without emotion.  Unfortunately, this is an impossible task and sets the trader up for emotional hijackings.  Emotions are the way the organism (again Jeff and you) responds to environmental changes.  They are going to happen.  The emotionally intelligent trader USES emotions to create the mind (all thinking is emotional-state-dependent) that engages uncertainty with capital at risk rather than getting hammered by default emotional programming that governs the way you respond to uncertainty and risk.  This is important because the instinctual emotional brain cannot differentiate psychological discomfort from biological fear.  To it, when you experience the vulnerability of risking capital with an uncertain outcome, it views this as a mortal threat and responds by the fight/flight response.

Once triggered, the emotion revs up, preparing the trader for confronting the threat (i.e. the saber-toothed tiger) rather than calmly and coolly working the probabilities.  Once the emotion has aroused for action, its chemistry enters the blood stream and brain – and rational thinking is compromised.  This is when fear, anger, over-confidence, and/or greed do their damage to the trading mind.  So learning to master your emotional nature on uncertainty (which gives rise to the mind engaging uncertainty) is a major task every trader must accomplish in his/her development as a trader. Until a trader can learn how to understand and manage emotions effectively, getting at the historical narrative (where your beliefs are housed) is simply not possible.  Emotional state management is a basic core skill every trader needs to develop if he/she is to master the mind (self-narrative) that trades.

Fortunately emotional regulation and emotional intelligence can be taught.  Neither you nor Jeff are stuck with the mind that you brought to trading.  The mind that emerges from your emotional brain and survival instincts can be taught.  Let’s go back to Jeff’s re-occurring pattern of self-sabotage where he would give back all his profits after a strong profitable period.

Belief – the Glue that Holds Pattern and Emotion Together as a Narrative

First, let’s define beliefs for context here.  Beliefs are assumptions that take on the power of truth.  Your brain (when engaging the world) is fed sensorial information as it assesses the world around it.  Then your brain, based on these beliefs (see above definition) creates a virtual representation (historical narrative) that it then projects onto the phenomena of the markets.  The effectiveness of your virtual representations (your beliefs) is measured in trading by the health of your trading account.

These assumptions that have become true as your beliefs form the pattern-making machinery of the brain and mind.  And it is the beliefs you hold about your capacity to manage uncertainty and vulnerability that drives your trading performances and the life scripts that create the story you tell about trading.  You do not have these beliefs that create the historical narrative – they have you.  It is not what you say you believe that matters.  It is what you DO and think in the midst of engaging uncertainty that isolates the beliefs that are truly driving your trading and are reflected in your trading account.  The emotions that arise from your engagement with uncertainty tell you much about what beliefs are truly driving your trading. 

Now let’s take a look at Jeff’s reoccurring pattern (called the Historical Narrative) from this new perspective.  (I worked personally with Jeff so I have some insider information.)  Jeff was driven by a need to win (to prove that he mattered) rooted in his competitive spirit.  He also held the belief that he was not that smart so he had to work harder than anyone else to achieve.  And when he finally proved himself in competition or business, it made him feel really good.  He was proud of himself. These two beliefs (“having to win to prove that I matter and having to work hard because I’m not naturally good enough”) worked well for Jeff until he started trading.  Before trading, he could control nearly every outcome using this hard work, competitive, and winning mindset.  (It even worked for a while in trading as he earned the right for a funded trading account.)  He naturally felt good when he started trading well and showing other people that he had the “stuff”. That made him feel even better.

This “feeling good” was not rooted in a humble confidence.  This feeling good that he experienced when he proved himself and showed others that he was a winner was euphoria (i.e. a dopamine reward system).  But euphoria is dangerous to the trading mind, where a balanced and emotionally stable mind is needed.  Winning, after the hard work of proving his value as a human being, gave Jeff a huge injection of dopamine.  And as a short-term problem solution it worked well as his hard work did lead to the desired outcome – winning and proving that he mattered.  Out of this successful solution arose a habituated pattern of interacting with the world around Jeff and this became the historical narrative from which Jeff acted.  And why not?  After all, he had proven himself successful.

Then he started trading where the same rules did not apply as they had in school, athletics, and business.  The same hard work got him funded, but it also rewarded him with a dopamine rush.  That rush generated euphoria or what you might call “feeling good”.  Remember, Jeff not only is feeling good at winning a trade, but also at proving himself.    Suddenly this old historical narrative rooted in hard work, winning, and proving the self by conquering outcome became obsolete and limiting.  It could not conquer uncertainty and probability.  A new construction of the Self was necessary.

Reclaiming the Narrative Power of the Mind

What I invite you to notice is that Jeff (as representative of the vast majority of traders) had no clue about this re-occurring pattern in his trading.  It was not happening because it was his lot in life.  It was happening because the brain/mind had created this behavior as an adaptation that worked, and then it was wired into pattern long before he could think and have an opinion about it.  Now, trading has forced the issue.  He is forced to look at the repeating pattern in his trading life if he wants to survive, much less prosper, as a trader.

In next month’s article we will explore how a trader can learn to step out of the historical narrative that has a hold of him (or her) and change it.  Until then, start noticing the patterns that keep re-occurring in your trading.  No need to ask “why” right now.  Just notice the patterns.  That is where your historical narrative will be found.
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