Getting Unstuck: Mastering the Emotions of Trader Psychology

Articles on Trader Psychology by Rande Howell, Trader Psychologist




“I think I’m staring my trading psychology in the face and don’t see it.  I’ve been stuck in the same place in my trading for a number of years now.  And I don’t know how to get unstuck. Often I think I do – then it doesn’t work out. The potential is there – the knowledge and my desire to achieve.  But every time I start getting close to everything coming together, the same old ugly patterns keep grabbing me and destroying what I have built up.  It keeps happening and I keep thinking that I can push through this problem and win the game.  But that’s not what is happening.  My will is strong and I’m not a loser.  So why can’t I just make myself a disciplined trader?  I see what I need to do, no problem.  Then, wham, suddenly I’m not doing it and I give it all back.”

Your Thinking Brain Will Fool You into Believing It’s in Control

            What is this trader missing? He seems to have the success formula – motivated, knowledgeable, hard-working, and goal oriented.  Yet something blocks his way.  Misguided assumptions about how the brain, emotion, logic, and mind really work keeps traders stuck in unproductive trading all the time. Rene Descartes got the ball rolling with his famous line – “I think, therefore I am” – and ushered in the Age of Reason.  All in one fell swoop, the mind was separated from the body (brain) and reason was separated from emotion.  It felt so right, it made so much sense, and it freed humans from the tyranny of emotions. No one noticed that this was, and still is, a dangerous false assumption…no matter how right it feels.  The focus on Reason, at the expense of instinctual emotion, set a trap that traders keep falling into because they don’t see the trap.

            And there is no greater place to see how dangerous this assumption really is (emotion and reason are separated, and reason trumps emotion) than in trading performance.  On a daily basis logic and reason (the thinking brain) are gunned down by the influence of your instinctive emotional brain.  Just ask any trader who just broke his rules due to fear, threat, or anger when there was a loss of control. The trader never saw it coming because feelings happen BEFORE thought occurs and with much greater speed, and the emotion is already influencing how you perceive something long before you can think about what you feel.  Yet because humans so easily fall into the same trap as the father of the Age of Reason (our friend Rene Descartes), they believe that they are being reasonable even though their thinking mind is being dominated by their emotional brain.

            Why don’t people learn?  You would think after reason has been slammed a number of times by the emotional brain that a smart, hard-working trader would learn that the emotional brain has far more influence on the thinking brain that the thinking brain has on the emotional brain.  But reason feels so right and true that you fall for it time and again.  

            Why is so hard to learn when the survival instincts of the emotional brain are in competition with the reason circuits of the thinking brain?   Reason makes us feel that we are more in control of a situation after the fact.  Reason creates an explanation (fabrication actually) of what the emotional brain has already decided.  The thinking brain is not really using reason.  It is using rationalization instead.  It just “feels” like reason is being used.  The essential difference between emotion and reason is that emotion leads to action and reason leads to conclusions and explanations.  The deed is already done by the emotional brain and the left brain makes up an excuse.  Meanwhile, traders attempt to control emotion by brute force (believing that reason is in control) when emotion tells the thinking mind what to think.  This is putting the cart before the horse.  It stays that way until you realize that logic simply produces an explanation based on the emotion that gives rise to thinking.  Thinking is highly overrated.  Yet the trader keeps believing that emotion and reason are separate and that emotion is the bad guy.  In truth, thinking serves emotion.

           Emotions will always color perception and inhibit change to enhance self-image due to the survival instinct of self-preservation.  It is this self-image of being a winner (and not a loser) that is constantly being put to the test while trading.  So successful in other fields of endeavor, that very self-mage of being a winner (i.e. I’ve got to be right) is what keeps getting traders into trouble.  They have a “winner” self-mage that has to be protected.  Yet traders who survive the learning curve and become effective traders learn that they are not in control of winning (outcome).

           Traders come to trading convinced they are “winners” as a construction of the Self (self-image).  And this self-image is immediately and permanently challenged by feedback from the markets.  To the emotional brain this feedback triggers an alarm.  To it, the organism (that would be you, the trader) is experiencing a biological threat.  Remember, the emotional brain does not distinguish between biological threat, psychological distress, and/or uncertainty. 

           The obstacle is this self-image of being a “winner”.  Otherwise my sense of worth, power and status (as a winner and the one in control) is threatened.  This thinking is not necessarily a bad thing.  Building and maintaining a story of being a winner is effective and recommended for many endeavors, particularly in domains where social interaction is part of being successful.  However trading is a domain of participation where probability is the central operational criterion, rather than social interaction and the status fix of being a winner.

 Rethinking Winning

            Essentially traders focus on what they already know and feel comfortable with (certainty) rather than information that is not consistent with their self-image of being a winner (or not a loser).  This focus locks them into repetitive patterns of poor performance because they are trying to control what is not controllable.  The more they try to force their will (mind over matter) and be right, the more the fight/flight response triggers in the emotional brain.  This emotional response (with its attendant thinking) is fixed into habit and fires reactively when uncertainty is engaged.  So much for depending on reason and logic in trading.

            This is when fear of loss, chasing trades, revenge trading, and fear of missing out ambush patience, discipline, and impartiality and create a reactive pattern in which most traders stay stuck.  A focus on winning (controlling outcome and self-mage) is confronted by the real feedback of losing.  Now the trader has a psychological problem.  His performances (winning) do not support his self-image of being a winner.  This is where traders develop anxieties and anger management problems in their trading.  They keep trying to force the idea that they are a winner when the evidence shows that a “winning attitude” does not work in trading.  Yet it is all they know and they are very resistant to changing their self-image of being a winner.

            But what if they did have the courage to confront their idea of themselves as a winner?  What if they re-developed their self-mage from a focus on winning (which they cannot control) to performing (which they can greatly influence)?  Suddenly their self-image is no longer under attack, signaling a biological threat to the emotional brain.  If, instead, the trader became the manager of the mind that was brought into the moment to engage uncertainty – winning and losing would look very different.  This represents a different organization of the Self to project upon the markets and from which to get feedback (adapted self-image). 

            Then the trader is not trying to win so that he protects or enhances his self-image. Rather, he is acting to maintain a performance level that secures his self-image.  He becomes a manager of probability, rather than clinging to controlling certainty.  This he can do regularly and with confidence.  It is a performance with no control over outcome, so he grades himself by the competence of his performance – not whether he wins or loses.  So his sense of self (his self-image) is not trying to control what he cannot control any more.  By doing this, the trader’s instinctual emotional responses to threat do not trigger the fight/flight response and the trader can stay disciplined and patient as a way of preserving his new adapted self-image.

            A chunk of a competent performance in trading is concerned with minimizing losses as they occur (becoming a good loser – so alien to a “winner’s nature).  Or not trying to make winners out of losers by “giving them a little more room”, moving stops, and/or throwing good money after bad.  There is room for becoming a great loser (minimizing losses) as a competent probability manager of risk.  The trader no longer has to protect his “winner” self-image by not losing or not being right.  The trader accepts his powerlessness to control outcome.  And in doing so, he claims something greater – he listens to what the market is willing to give and to take with no personal stake for his fragile ego.  His self-image is rooted in performance, not outcome.  This is a massive paradigm shift in the mind that the trader brings to trading.

Harnessing the Tools of Transforming the Trading Mind

            The biggest problem that traders face is themselves.  There are plenty of smart traders who are not consistently profitable.  There are plenty of highly knowledgeable traders who cannot keep it together to become consistently profitable traders.  This need to win, to be right, and/or to not lose to maintain and protect their self-image rather than become a competent trader stands in their way.

            Only after traders blow up their capital to dangerous levels do they see that the problem in their trading stares at them in the mirror.  This need to preserve their self-image gets in their way of their growing as a trader.  It is both a biological and psychological conundrum.  Most turn a blind eye to the problem.  They don’t allow themselves to experience the fear and shame that would come with a disturbance to their self-image.  To the primitive emotional brain, maintaining the feeling of being a winner (even if it is a deception contrary to the evidence reflected in your trading account) is far more instinctual and subconscious than changing the way you perceive. 

            This tougher course of action takes courage and the willingness to face discomfort and learn from it rather than to stonewall the truth staring you in the face.  That’s the tough part.  The good news is that self-image is malleable.  When forced to, people can change. But it takes a willingness to change.  Imagine that you decided to change by intelligent design, rather than staying till the ship went down…what a difference it would make!  My question to you is this:  When you trade, what are you trying to do?  Are you trying to win?  Make money?  Are you trying to be right?  Are you trying to not lose?  These are things that you cannot control.  (No wonder that a trader’s self-image feels like it is under attack.)  Or is your focus on performing in the moment?   

            If you are acting from a need to win and be in control (in all its forms) to preserve your self-image – is it working for you, based on the health of your trading account?  Last question:  Which is more important to you – winning or being effective as a way of managing your trading mind?  The only engine of survival, long term, is effective performance.  Would you be willing to change your notions of winning and losing if that were the only real option?  Think about it.  The markets will give you honest feedback no matter what you decide.
Back to blog