Articles on Trader Psychology by Rande Howell, Trader Psychologist
“Taking that first loss isn’t so bad. I know the platitude: losing is simply a cost of doing business in trading. It’s the second and the third loss that do me in though. Something happens then that defies reason. The pressure is on and I don’t want to lose. An urgency swells up in me and I am compelled to get back to break even. And, in the heat of the moment, it IS the thing to do. But when the smoke clears, there is an even bigger hole in my trading account. If I could solve this one problem everything would change.”
Emotional Discipline Meets Primitive Survival Instincts
Like this trader, you know in theory that successful trading is about taking one trade at a time - then letting go of the results of each trade before moving to the next trade, so that the emotions of winning or losing do not contaminate the mind that engages the next trade. And the trader quoted above can do that up to a point. He can take one loss and be fine (maybe two). But something happens at some point that erodes his disciplined mind and replaces it with a mind rooted in desperation, fear, and/or anger. Suddenly, like a flash flood, his mind is possessed to make up for prior losses out of a fear of losing or anger that the markets have taken your capital…and you’re possessed to get it back.
It is right here that theory and practice separate. Intellectual knowledge of trading (talking the talk) falls apart when challenged by loss, and continued loss (walking the walk). Traders try to out-think primitive emotional responses to challenging moments, not understanding what they are walking into. In the case of trying to make up for prior losses that often leads to revenge trading, the trader is triggering primitive survival instincts of the emotional brain that overwhelm the thinking brain. The deception is believing that the Thinking Brain (neo-cortex) is separate from the Emotional Brain (limbic system).
Actually, the Thinking Brain and the Emotional Brain work hand in hand to produce the mind that engages the uncertainty and challenges of trading situations. And, as stress builds, the Emotional Brain has a much greater say-so in the way you respond to danger (i.e. fear of loss and the felt need to make up for losses – aka claw-back bias) than does the Thinking Brain. It only appears that emotion and reason can be separated. The more challenging the situation (taking multiple losses), the greater influence the Emotional Brain has over the Thinking Brain. Reasoning (the capacity to be objective) is compelled to rationalize what the Emotional Brain believes as the stress is ratcheted up. What started out as a trickle (where reason seemed to be in control) becomes an all-consuming flood – where the Emotional Brain has hijacked the Thinking Brain’s capacity to reason as the perceived danger looms.
This is not an individual’s psychological problem. Rather, it is your evolutionary psychology. This is how your Emotional Brain learned to survive in the really dangerous times of our Caveman ancestors. Limbic learning moved from learning that was successful for surviving in a dangerous world to genetic transmission of a state trait into future generations. Those are the subconscious biases that drive the mind you brought to trading…good for short term survival but bad for probability management. Think of it in these terms from your evolutionary psychology - something (the markets) has caused you pain (a threat to life) and you are going to fight back. You are not going to take it. Something has been taken from you and you are going to get it back. In the dangerous world of our Caveman ancestors, the pain of a loss meant a threat to biological life. And it required an immediate and powerful response for survival’s sake. This is the origin of your survival instincts rooted in the Emotional Brain. It is also what is going on below conscious thought threshold in the brain, engaged in taking several losses in a row.
Now, as you experience a loss or a series of losses in your trading and watch your P&L take a nosedive, you are experiencing the urgency of your survival instincts. (Remember that the limbic learning that was successful got wired into your genetics.) From the Emotional Brain’s perspective, you have to fight back against something that is hurting you. The problem is that the hurt now is psychological discomfort. But then (and in the limbic system), it is a threat to your very existence. Nobody told the Thinking Brain about this. The message simply got routed directly to the fight/flight response of the amygdala in the Emotional Brain. Based on the level of perceived danger and the limbic beliefs about your capacity to manage the uncertainty produced by the loss, the message never got to the Thinking Brain where your capacity to reason resides. You are now acting from survival instinct, which has taken over thinking. Thinking is now just fabricating a story to support what the Emotional Brain has already decided.
Building a New Partnership Between the Thinking Brain and the Emotional Brain
Trying harder is not going to work. Magically thinking that the problem will go away won’t work either. Denial only makes the problem worse. The solution first starts with understanding the problem with new eyes. This is what I have presented in this article so far. Now, how do you solve the problem of losing your discipline after a loss or several losses? (BTW – winning several in a row creates a similar problem but in the opposite direction.)
It’s all about Emotional Intelligence and how to better manage the emotions that give rise to the mind you bring to the engagement of uncertainty. Emotions are not optional and it is impossible to leave them at the door when you trade. That is denial. They are always there, acting in partnership with thinking. You cannot control emotions by brute force, willpower, or by pretending they are not there. But you can manage them and, as you grow in Emotional Intelligence, you can control what emotions trigger when you engage uncertainty. This is what I call Emotional Mastery. You are not conquering your emotional nature. Instead, you are mastering your emotional nature….especially what emotions arise when you (as a trader) encounter risk (capital) to an uncertain outcome. Survival based emotional instincts will automatically trigger (and all the problems attendant to that) if you do not develop the Emotional Intelligence to deal with the brain’s distaste of uncertainty – and its corresponding confusion, vulnerability, and movement to fight/flight. Learning to do that is the process I teach that is outlined below:
Emotional Regulation. First and foremost, the emotions that trigger when you take a loss have to be regulated so that they do not escalate and become problematic. This is where breathing and muscle relaxation are learned as skills for calming down emotions. E-motions are biological in nature and push you to act in a certain direction. They take over your psychology in the process of the urgency toward action. Because they are biological, they also have a biological signature that includes a breathing style and a muscle tension style as they gather steam. By interrupting this signature through the way you breathe and relaxing tense muscles, you disrupt the arousal of the emotion before it takes over your thinking. This is the first vital step.
Mindfulness. Second, mindfulness is the capacity to step back out of your identification with your thoughts and beliefs. You come to realize that you and your thoughts and beliefs are not you. In fact, you do not have thoughts and beliefs – they have you. They represent only one potential organization of a Self – not “You”. It is the historical organization of the Self that needs to be re-adjusted to suit the needs of the mind that engages uncertainty. Your Caveman brain is simply not up to the task. The Intentional Mind is the goal of Mindfulness.
Recognizing the Historical Dialogue. Have you ever noticed that there is a commentary going on in the mind all the time? It is a constant chatter with lots of opinions, judgments, criticisms, and temptations. This is the Historical Internal Dialogue. It is this ignored commentary that has to be brought into the light of your awareness and changed in order to be able to re-shape the mind for probability thinking needed for effective mind management while trading.
Discovering Your Empowered Nature. Just as there is fear, pride, greed, and criticisms that live in the conversations of the mind, there are also emotional programs that are conducive to a probability-based mindset. These are discipline, courage, self-soothing (self-compassion), and impartiality. These emotional programs can be trained to come forward when you engage uncertainty rather than the emotions derived from the survival instincts of your ancestral Caveman days. They are the primitive emotional beliefs that you hold about yourself that you are projecting onto the markets. These are not your beliefs. Through Limbic Learning, you fell into and fused to these beliefs through your evolutionary psychology and through your family of origin. But they represent only one potential organization of the Self. By developing these other aspects of your potential, you change the Self (the mind) you bring to the management of Uncertainty. This is the game changer.
Meeting the Challenges of Engaging Uncertainty. Struggle is simply part of the human experience, whether in trading or life. In that struggle you discover that you do not control outcome, whether you are right or wrong, and that you cannot predict with certainty the outcome of a situation. The brain, in its historical organization, does not deal with uncertainty well at all. In fact, it falls apart – as evidenced by your trading problems. But what you can control is construction of the mind that you bring to the engagement of uncertainty. This you can control with training. This is the psychological edge that so many traders miss out on. They often have a statistical edge in their trading system, but their mind cracks under pressure – and that edge never gets to manifest.
The disciplined, courageous, self-soothing, and impartial mind can be built. The beliefs behind the emotions can be examined and re-built to bring the psychological edge needed to run the statistical edge. This mind is not looking to win or lose – it is looking to perform. And by performing at peak levels while focused on performance (which you can control), the need to win and not lose (which you cannot control, which makes you feel powerless) takes a back seat. It is about performing to create the edge. In that edge is the possibility of consistent profitability. This is where the Emotional Brain and Thinking Brain are cooperating with one another, producing the peak performance mind. Uncertainty is no longer feared. Winning only means you landed on the right side of probability, relative to you. Losing only means you landed on the wrong side of probability, relative to you. Winning or losing do not become the basis of judging the Self. This is a great freedom every trader needs to acquire (not just in trading, but in life). Without the fear of losing that overwhelms the Thinking Brain, the disciplined mind becomes the new emotional habit that greets uncertainty in the moment. The emotions of uncertainty are mastered. And you are released from the grasp of your instinctual emotional survival programming. This is emotional mastery of the trading mind.