How to Build a Calm, Patient Trader Psychology

Articles on Trader Psychology by Rande Howell, Trader Psychologist




The moment that real capital is put at risk in trading, everything changes.  Trading goes from an intellectual exercise where loss is abstract and not personal to a visceral experience where potential loss unhinges the rational mind and primitive emotional responses take charge of the trading mind.  After experiencing real losses, the emotional survival brain even starts anticipating potential losses (rather than gains) and hijacks the trading mind BEFORE action decisions are made.  If you have dealt with fear of entering a trade or fear of pulling the trigger on a perfectly good set-up, you have experienced the baffling power that survival emotions have over rational thought. 

Or if you have perceived that a trade could be getting away from you if you just sit there and wait for it to shape up properly, then muscled your way into the trade, only for it to collapse – you, too, have experienced survival instincts overriding rational thought to create a mind incapable of trading effectively.  Other traders are primed for over-trading when their desire to experience the feeling of winning big (and receiving that squirt of dopamine that creates euphoria in the brain) mesmerizes their rational trading mind and morphs it into the gambler's mind – where restraint is forgotten in the pursuit of a dopamine rush (winning money). 

It seems like these emotions take over your trading mind out of nowhere.  But that’s not the case.  It is more about a lack of understanding regarding your emotional nature and not knowing what to do about it.  And particularly it is about not understanding how the survival instincts of the emotional brain overwhelm the rational thinking from the neo-cortex.  Let’s step back a bit so that you can begin to understand what is actually happening when you experience fear of loss or when you experience the greed associated with over-trading or impulse trading (what I call gambling).

Emotions and the Act of Trading

Traders try to control emotions without understanding them.  And this oversight gets them in trouble all the time.  Because of that, most strategies for emotional control work only in the very short-term and collapse when put under pressure.  The most misdirected common emotional control methods involve denying the emotion, resisting the emotion, or using positive affirmations (i.e. “I am a disciplined trader! I am a disciplined trader!”) to control the unwanted emotion.  This is an attempt to push the emotion aside as if it were not connected to your capacity to think.  As we develop more understanding of emotions, you will come to understand why these methods (though popular) are both misguided and add to the problem of dealing with emotion and the mind.  In essence, you will discover that you have been attempting to push a 600 pound silver-back gorilla around.  Full of testosterone, but misguided.

First, what is an emotion?  For years Cognitive Behavioral Theory (CBT) held that emotions happened after thoughts.  This theory holds that the way a person thinks about an event creates the emotion that arises out of the experience.  (Actually the reverse is true.  What Neural Biology has established is that emotion is first – thought comes forward out of emotion, and that all thinking is emotional state dependent.)  But this idea that thought comes before emotion and that thought is the king came many years before CBT.  It started with Rene Descartes, who opined, “I think therefore I am”.  So people have, for centuries, held the belief that thought was first and that emotion was of secondary value.  And that is the very same bias that most traders bring into trading.  They want to push off the relatively “unimportant” element of emotion so that they can get to the rational mind – and trade without emotion.

Unfortunately we have put the cart before the horse.  (Think of the emotion as the horse and thinking as the cart.)  Emotions are not even psychological in nature – they are biological.  But they take over psychology.  All thinking is emotional state dependent.  It is the emotional state that governs what kind of thinking you bring to the performance of trading.  There is no freedom from emotions as Descartes envisioned.  No matter how appealing this notion is, the facts demonstrate that logical thinking (Spock thinking) without emotional support is an illusion.  The problem is that unwanted emotions keep popping up and hijacking the trader’s mind.  And traders don’t see the hijacking coming because they are denying the power of emotion and trying to control the emotion by willpower.  (Remember that 600 pound gorilla?)

But why can’t you control an emotion by willpower?  To begin with, emotions are biological action potentials that coordinate the interface between the organism (that’s you, the trader) and the environment (the markets).  Literally, changes in the environment of the market you are interacting with will trigger emotions in the organism (that’s you, the trader) that control thinking output and action.  This is the dance of trading.  When you are looking at a potential set-up with evidence for entry, this dynamic emotional relationship exists between you and the markets.  As you are evaluating a potential trade, you are looking for certain confirmations (positive developments in the market).  As the confirmations are checked off, you are preparing for taking action in the market.  That action is predicated by your emotional appraisal (more about that later).  The emotion as biological action potential is preparing you to take action by entering a trade or letting it pass by.  Either way, emotion has created thinking that allowed you to act upon the environment of the markets.  Logic becomes possible only after both fear and greed are regulated so that they do not take over the thinking of the mind.

The Glitch – What the Brain is Designed to Do

Your brain’s prime directive is self-preservation – keeping you alive.  It will do anything to accomplish this mission, including lying to and deceiving itself.   It was built to control both environment and outcome.  And there was a time not so long ago that this was a major problem.  The world in which our human ancestors lived was dangerous, so self-preservation was a serious task.  By seeking control over outcome IN THE SHORT TERM, the brain of our ancestors adapted to the lethal dangers that lurked in their environment.  By concretely surviving in the short term, our ancestors developed lightening quick emotional responses to dangers in their environment THAT PRECEDED THINKING, because thinking responses to threats are too slow for survival concerns.  As a trader you experience this problem every day when emotion runs over logical thinking in the heat of a trade. 

During the development of our emotions (remember those biological action potentials that coordinated action between the organism and the environment), short term survival was more highly valued than long term benefits.  This development became wired into the emotional brain as pattern, so as soon as cues from the environment demonstrated threat to life the brain fired up the emotion as precursor to taking action instinctually.  Everything went along great until the thinking brain began to emerge from the emotional brain.  All these survival instincts were already wired for self-preservation before our ancestors started thinking.  So it was natural for the survival instincts that had been so successful in our more primitive past to be selected as we evolved into modern man.

The glitch is that your brain cannot tell the difference between a biological threat to survival from long ago and the psychological discomfort you experience when you encounter uncertainty in your trading.  (No one told the emotional brain about it!)  And it continues to act as if any threat to your power (your money) is a threat to your very existence.  Self-image around your sense of power to survive and the symbol of money became linked.  And this is where the brain and trading became poor bedfellows.

The way it works in the brain is that information comes in through sensorial data FIRST to the emotional brain. Here it is quickly evaluated first by the hippocampus.  If the information is remembered as a danger to life (remember it sees psychological vulnerability the same as biological threat), it is immediately sent to the amygdala (fear center of the brain) for immediate action (that’s what an emotion does) without sending the information to the thinking centers of the brain.  This is called an emotional hijacking.  And do you remember that linkage between your self-image of power and of money as a symbol of power?  Here is where it comes into play.  The sensorial information never gets to the thinking brain.  And you act from the instinctual survival emotions of fear, anger, and/greed.  Thus your capacity to trade effectively is lost.

Correcting the Problem of Survival Instinct   

Unless you won the genetics lottery, the brain/mind you brought to trading is simply not equipped to produce success in trading.  It was not built to deal with uncertainty.  Instead, it was built to deal with the certainty of survival in the short term.  For the vast majority of traders with a typical emotional architecture, this new adaptation has to be learned.  Traditionally in trading continuous exposure to uncertainty and risk has been the method used to force the brain to re-adapt its established patterning (this is known as exposure therapy in psychology).  As appealing to logic as this method is, it has not proven to be an effective way of forcing the brain to change survival strategies that have long been translated into traits passed along through history.  Actually, exposure based solutions re-traumatize the trader so that he or she becomes even more emotionally reactive to uncertainty and the lack of control over outcome that is a given in risk management. 

In trading, to be effective, you have to cool the reactive primal emotional circuitry so that you can think in the long term – probabilities.   This is not what the brain evolved to do.  But if you need your brain to shift from the survival instinct of short term self-preservation (survival success) to probability management for success in the long term, you will need to harness the brain’s neuro-plasticity and consciously adapt it to the new standard.  Much like there are therapies for stroke rehabilitation based on the neuro-plasticity of the brain (where they re-train and re-route functions of the brain to accommodate injured areas) so too can the brain be re-trained to experience uncertainty and fear of the unknown very differently than the primitive circuitry of the fight/flight response of the emotional brain.

To do this, you will need to train your brain’s response to uncertainty.  To the emotional brain, uncertainty is a bad thing when it comes to threats. (And as long as you risk capital, your brain will view uncertainty as a dangerous occurrence in your environment.)  Currently your brain is organized to view uncertainty this way:

UNCERTAINTY      >         VULNERABILITY        >         THREAT         >        FEAR/ANGER

This is the survival instinct response that traders experience every day.  Notice that psychology does not kick in until the emotion is already coursing in your body and brain as chemistry. Logical thinking is hijacked before it even gets started.  The moment that uncertainty rears its head when capital is put at risk, it is wired to interpret that experience as a threat to self-preservation (vulnerability).  The felt experience of vulnerability triggers your sense of powerlessness so it is interpreted as a threat to biological life, rather than just psychological discomfort.  From here, the rational brain/mind is automatically hijacked and the brain pushes you into fight/flight with its goal of short term survival. 

This is where you experience fear of loss, fear of entry, fear of pulling the trigger, self-sabotage, revenge trading, over-trading, and the like.  Psychology showed up late for the game and was overwhelmed by primitive emotional response to perceived threats from uncertainty.

Harnessing Neuro-plasticity for Probability Management

It is a specific circuit that has to be re-programmed to start the change process.  When sensorial data comes to the emotional brain, it is first evaluated by the hippocampus.  Based on memory stored there, a decision is made to route the information to the thinking brain so that logic and reason can be applied to managing uncertainty and risk (desired outcome).  This is called the high road. It takes more time for this circuit route to come to conclusions that can be acted on, but this is where probability management (and not life and death decisions) occurs.

But if the hippocampus decides that the matter is too threatening to sit around waiting for a reasoned response, a decision is make (literally in the blink of a moment) and the sensorial information is routed to the amygdala, where fight/flight responses govern emotional and behavioral responses toward the environment (the way you react to the anticipation of trades going against you or the reality of a trade going against you).  Here the amygdala hijacks the thinking brain and the trading mind is toast.

The needed key skill here is to regulate the emotional sensitivity so that the hippocampus doesn’t overreact and hijack the rational mind from being part of decision making.  Using diaphragmatic breathing and muscle relaxation to interrupt the genesis pattern of an emotion is a highly effective method for emotional state management.  Because emotions are biological, they also have a signature that includes breathing style and muscular tension.  These aspects of the emotion are necessary for the emotion to grow to the point of overwhelming the rational mind.  When the emotion is confronted by a change in breathing style and muscle tension, the emotions of fear and anger cannot maintain themselves.  You are literally cutting off their fuel.

Once you have competence in managing the physiology of the emotion, the belief system behind the emotion can be examined through applied mindfulness.  Ultimately this is about a learned belief that leads you to fear uncertainty or to embrace uncertainty.  This is the work of trader psychology.  Talking about trader psychology may stir intellectual debate, but the real work of trader psychology is about re-working the beliefs you are projecting onto the markets about your capacity to manage uncertainty (with your trading account as the arbiter).  Simply being knowledgeable is never enough.  What really matters is the hard, but satisfying, work of examining the beliefs that drive your performances in trading.  Biologically, you inherited beliefs that you must be in control (either by sheer will – a winning attitude, or not losing by being perfect) that are impossible to maintain with the feedback loop of your trading account.  Psychologically, you learned about being a winner as part of your self-image – where performance and being became fused together. 

Again, holding up the self-image of needing to prove yourself a winner in the face of taking losses as part of the business of trading is an impossible task.  Your notion of winning and being a winner are the fundamental beliefs that have to be adapted for success in trading.  When this happens, you are freed from the instinctual survival drive in the short term and the need to prove yourself as a winner.  You have no control over whether you will win or lose – but you have enormous influence over the beliefs that drive the performance of your trading process.  This is the new “Winning Nature” that bridges the gap between controlling outcome (which is impossible) and controlling your process (which you can do repeatedly).  This leads to the calm, patient mind needed for successful trading.
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