Emotional Self-Mastery: The Foundation for Building a Rock Solid Trading Psychology

Articles on Trader Psychology by Rande Howell, Trader Psychologist




“Man makes plans and God laughs”

What’s the biggest problem in the development of an effective trader?

I didn’t think trading psychology applied to me.  It was for people who couldn’t get their act together.  Maybe a little too “touchy, feely” also.  Convinced I had the “right stuff”, all I needed was to have experience under my belt. And, in my bones, with that experience I was just going to evolve into a successful trader by force of will.   I thought – I have that special “something” that will make trading work for me.  Clearly I earnestly believed I had the psychology of a winner and I was going to apply it to trading.  I never doubted that to be the truth.  It felt so true that I accepted it as a fact.

Five years later and a whole lotta money down the drain, I’m not so sure anymore.  Over the last couple of years, I have become profitable, but I leave way too much money on the table.  And I can’t seem to break the pattern.  I keep trying harder, but I keep leaving money on the table.  I’ve come to realize that this pattern is not going to change unless I change.  And apparently, no matter how confident I am of my skills – that confidence is misplaced causing me to keep shooting myself in the foot.  I hate to admit it, but my trading account is a cold calculating reminder of my progress as a trader.  I’m beginning to see that I really don’t have that special “something”.  Instead, I recognize that I am not in control and cannot make things happen.

That confidence I had made me feel like a winner.  I wanted to be right and to be in control. But when I look at my performances, they tell a different story – one that I don’t want to hear.  Feeling like a winner and being a winner in trading are very different things, I’ve discovered.  Either I will continue believing the deception I keep telling myself, “success is right around the corner and I’m going to push myself to get there”, or I need to face the truth – there are unseen forces at work in my mind that I am not going to master by myself and these forces keep me from my goals in trading.  And, in truth, I don’t know how to deal with them. 

No matter how much I try to convince myself that I’m in control, my trading account tells me that change in me is needed.  It’s as simple as that.  I just didn’t want to hear it.  It has taken me 5 years to accept it.  That’s a lot of money and time down the drain.  I just wanted to be right, even when the evidence was to the contrary.  It’s time for me to get out of my way.  I’m finally ready to swallow my pride and do what I should have done years ago. 

My illusion of invincibility wants me to believe I’m in control, but the facts are that I am stuck as a trader.  I’ve finally looked in the mirror, and I see the problem and the solution – me.  I see what is possible with my system and I see what my results are.  Big difference – and I am that difference. Why has it taken me so long to come to terms with the truth?  It could have been so much easier.  It just felt so good when I was lying to myself. But that hasn’t turned out well.  I’m now ready to work on myself.  Seeing more clearly now, I see it is the missing puzzle piece that has eluded me for so long.  In many ways, it is a relief. I used to fear what “they” might find was wrong with me.  Now, I want to find and fix what stops me from achieving what I know to be possible.


Getting Real about What Stands in Your Way

This is part of an email that I recently got from a trader/active investor who manages his own fund for investors. What struck me was his honesty and the price he paid to become honest with himself.  And I see the same thing every day.  Bright, well intended men and women hitting a wall of their own making (without knowing it) in their trading and then continuing to ignore the need for psychological self-development of their trading mind.  The mind needed for success in trading is very different than the mind that you bring to trading.  Few traders will ever figure this out.

Does your story about success in trading square up with what your trading account actually reveals about your competency to make money trading?  Traders, at all levels, tell a story internally to themselves about what it takes to win at trading that is rarely backed up by actual performances, as measured by the health of their trading account.  It is this gap - between the fiction that the trader tells him or herself about what it takes to be a consistently profitable trader and the reality of actually being able to manage emotions under the stress of risking capital in an uncertain future – that is exactly what your trading account to going to tell you, whether you want to listen or not.

Let’s take a look at the problem(s) that this trader is grappling with.  Let’s start with his unwillingness to acknowledge to himself that his psychology is actually a problem (and, therefore, doing nothing about it).


Self-Preservation: Our Survival Instinct’s Bias to Resist Change

The problem of emotional reactivity starts with biology and evolutionary adaptation for survival.  You’re brain’s major job is to organize your potential into a structure that allows you to survive the environment to which you are born and in which you live.  This is job #1.  That structure is called a potential self or, as you may know it, “I”.   You become so identified with this particular construction of a self that “you” no longer see that there are other (and more useful) potential organizations.  Consequently, you get stuck in a very narrow way of perceiving the world around you that is exposed by trading.   And you fail to see that emotions coordinate activity between the organism (that’s you, the trader) and the potentially dangerous environment (that’s the markets you trade in).   

When the brain finds a successful organization of the self that works (allows you to survive), it locks in that structure, and over time and with more successes it becomes highly resistant to change.  It becomes a bias that acts like an invisible hand.  So the brain creates and maintains a mind that has proven itself to be able to survive in its environment.  This is self-preservation.  Anything that challenges the comfort zone of this perceptual map (your mindset) is resisted.  This becomes a hardwired bias that you do not even see in operation or on a conscious level.

It now resists changing its successful ways (learned in the past based on short-term survival), which it perceives as potentially threatening.  In fact, the more stress the brain experiences, the more it hunkers down and becomes more set in its ways.  (This is called cognitive dissonance – and it is your enemy in trading.)  This is why traders keep making the same mistakes over and over again.  This is also the way the extinction of an organism (trader) or species (traders) occurs – by refusing to adapt when the world changes.  Think about what happened to pit traders when trading became digital – locked into their old ways, they could not adapt to the new way of thinking required of the electronic age.  And a mass extinction occurred because they could not or would not adapt to the “screen” environment.

In the vignette of the trader above, you see this in action also.  His brain developed in him a particular mindset about success and winning (and not losing) that carried him from his formative years to the advent of his trading career.  And as a successful former market analyst, he was all about predicting the future and being right – and convincing others he was right (that is what he was paid to do).  And it worked for him.  The brain locked in and habituated this formula for success.  He had what we call in psychology a strong self-image of himself as successful.  His brain and his survival instincts were going to preserve that mindset no matter what.

Then he started trading where he assumed the risk of uncertainty.  Everything changed.  His illusion of control was busted.  But his brain did not want to adapt to a new environment.  It was stuck in the old world and resisted change because his brain was out of the comfort zone of the self-image that had, in the past, proven successful for him.  This is the situation where most traders find themselves. What used to work, no longer works.  But they are incapable of seeing beyond their current structure of self.  Most refuse to step out of the comfort zone of their old ways because it makes them feel vulnerable and confused.  When that happens, the brain snaps back to what it knows – even if it does not work anymore.  That is self-preservation in a nutshell.

What is happening with the trader/active investor in the vignette above is actually very unusual in a good way.  He has recognized that that he has a bias problem with the way he perceives the world of trading BEFORE he ran out of capital (extinction).  He is beginning to see that he can design a new mind for the environment of trading rather than stay stuck in a mindset that no longer works.  Every trader comes to this fork in the road.  Few take the road less traveled.  Good reason – it is uncomfortable to admit that you are wrong and need to change.  (You are more comfortable with the demons you know than the ones you might run into).  The trader as a human being is wired to believe he can predict and/or control outcome.  This bias naturally follows him into trading and causes enormous suffering by refusing to let go of his need to control and feel that he is in charge.

From the start the trader, being flesh and blood and ruled by his survival instincts, is at a disadvantage.  Once he sees this instinctual bias and recognizes that it has out-served its purpose in the new world of managing uncertainty and risk, real change can happen in the way the trader’s brain interprets risk.  This is what has happened with the trader in the vignette.

Learning to Master (Not Control) Emotions

The first step is to recognize that there is a tremendous bias working against you as a trader.  That need to control and the feeling of certainty that you can prevail against all odds (so rooted in your evolutionary biology) is the default programming that you bring to the trading arena.  No matter how successful it was in the past for short-term survival, it becomes an albatross to you now in the new world of trading.  The world of trading is about embracing uncertainty, while the brain/mind you brought to trading is wired for certainty, prediction, and control.  Rewiring the default programming begins with calming the emotions that coordinate action/behavior between the trader and the environment of the markets (that’s what emotions do).

The default programming that you bring to trading is hardwired to perceive uncertainty as a threat to your survival.  When uncertainty raises its ugly head, the brain/mind concludes that it is not in control and the brain falls into confusion.  When the brain feels confusion, it feels vulnerable (because it is no longer in control).  Then the fight/flight response triggers.  And you’re off to the races with a hijacked mind, incapable of managing the uncertainty and risk found in trading.  (You might as well have a saber-toothed tiger bearing down on you.)

Fortunately emotional regulation can be taught.  You can learn how to regulate the intensity of the emotion so that it does not overwhelm rational thinking.  And as you gain emotional competence, you can learn to choose which emotions show up to engage uncertainty.  Certainly we do not want fear, greed, or anger to be the emotions that you bring forward to manage your encounter with uncertainty.  The challenges of uncertainty are still there, but you can develop a choice in the matter.  This is the game changer.

In much the same way that the military trains a soldier to maintain discipline of his mind in the fog of battle so that he thinks clearly in the midst of uncertainty, a trader can learn to maintain a disciplined and patient mind while engaging the uncertainty and risk of trading.  Both disciplines require re-training how the brain and mind responds to uncertainty, ambiguity, confusion, and vulnerability.  First the emotions have to be calmed down. Then the beliefs he has about his capacity to manage the unknown have to be shifted from a sense of powerlessness to empowerment.  To do this, the focus is shifted away from control of outcome to the management of the mind that is brought into the moment.  Focus on what you can control – process.  It is here that a disciplined, patient mind can be brought forward.

By shifting the mind from trying to control outcome (which can’t be done) to managing the moment of process, empowerment occurs and the fight/flight response of the primitive sympathetic nervous system is calmed down.  The outcome is still uncertain, but an empowered mind is now in charge rather than a reactive one.  Now there is a psychological edge driving the potential of the moment.  Instead of fear, anger, or greed creating the mind, disciplined patience drives the mind engaging uncertainty.

That would not be possible if the trader had not first overcome his inherent bias of the need to control and to be right (or be special).  Only then does the possibility of change open up.  It is this courage that traders really need to develop.  It is much easier to push off the need for individual change in the short term.  It is uncomfortable; therefore your survival brain pushes it out of awareness.  Yet the effective trader’s mind that is comfortable with uncertainty is the difference maker long-term.  Make it a conscious choice.  That is the first step toward emotional self-mastery – moving the brain from the survival instinct of control over outcome to the probability mind focused on managing the emotions of the mind brought into the uncertainty of the moment.  This is the successful trading mind.
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