Articles on Trader Psychology by Rande Howell, Trader Psychologist
“Just do it.” That’s all it takes. Everything seems straightforward when your Thinking Brain sits in the driver’s seat and is in charge. All you have to do is follow your plan, right? It seems so logical. Everything seems under control until your capital (your sense of power to control your own destiny) is wagered on an uncertain outcome over which you have no control. Then – boom, hello Emotional Brain!
This is when, out of nowhere, your Emotional Brain crashes the victory party. That capital risk – to it – is a threat to your very life. What was once all logic now becomes a high stakes poker game with your financial life on the line. The rational mind crumbles. And a fight for your life is underway, particularly if the trade is going against you. The trade is going to do what it is going to do no matter how much confidence you have in your system. But do you have confidence in yourself? That’s where you face Uncertainty. And this is also where you discover, again and again, the hidden beliefs that drive your performances when challenged by something over which you do not have immediate control. And until your Emotional Brain trusts the Thinking Brain’s skills under pressure, emotions win every time.
When trading, do you maintain emotional control and stay disciplined, patient, and clear-headed? Or do you get excited about the potential of the trade and then feel urgency to make things happen? Or do you get ambushed by fear as the trade takes on a life of its own and you feel powerless? When the trade goes against you, do you feel the overwhelming desire not to take a loss? If you have experienced any of these scenarios, you have been hijacked by your instinctive emotional brain’s need to be in control while facing the challenges of the marketplace. When that happens (and it happens a lot), you trigger to primitive fight/flight responses to perceived threat.
Let me give you an example from my work with a trader recently:
Samuel wants to win. He’s done his charting and is following his plan. And sure enough, a trade consistent with his plan begins to form. It’s still early, so there is no undue excitement yet. But it is promising. Then that potential trade has a series of converging signals that move it into being a hot prospect. Sam is excited about his prospects. It’s not often that all his signals line up like this. Sam thinks with a twinkle in his eye, “There is money to be made!”
Then the trade pulls back into a great entry point. But all the signals are still solid. This is a perfect entry according to his plan. He places his order and it gets filled almost immediately. The trade takes off. Sam can almost feel the money. He’s on a good ride. He feels good. The adrenaline surges at about the same time that the trade suddenly goes against him. Before Sam knows it, his position is flirting with his stop loss. So, he moves his stop to give the trade some run to play out. The trade goes against him more. He doesn’t want to lose such a promising trade. He lowers his stop again. The trade is heading for that stop now. “This trade will turn around. It was too strong. I don’t want to lose on this one. It was too good.”
You know the drill here. Samuel keeps moving his stop to accommodate what he believes is a trade that will make him a lot of money. Somewhere his expectation of winning a lot of money overwhelmed his discipline to plan his trade and trade his plan. If he had done that, he would have taken a small loss – totally acceptable for his position sizing plan. But that’s not what happened. Survival emotions (not wanting to take a loss) took over without his ever noticing it. Remember to the ancient emotional brain (aka Caveman Brain), taking a loss literally meant death. Over many years of programming, Samuel’s ancient ancestors did have to fight to the death for survival. Unfortunately for Sam, that instinct took over because (from the ancient Caveman Brain’s perspective) he was in a fight till the death. So not taking the loss was only a natural response to the stressor.
Mastering Your Survival Instincts Is the Door to Successful Trading
Your understanding and management of the survival instincts of your emotional brain is the missing link in your quest to become successful in trading. It is these instincts, carried over from your distant Caveman ancestors, that stand in your way. Their job is your survival in the moment. When you feel threatened, they are hotwired to show up first, before thinking comes online. To your instinctual Emotional Brain, both the urgency to take advantage of the situation (seeing a potentially great trade come together) and the tenacity to fight back and not take a loss are based on survival in the short term. They are not really psychological problems, but biological biases that must be managed.
The problem is that the mandate for short term survival conflicts with the need for a probability-based mind. Bottom line, the brain that you bring to trading is not geared to be successful in the world of working in probabilities. But, if you are willing to compensate for the gap between the Emotional Brain’s need for short-term survival and the needs of working with a high degree of Uncertainty, then you can train the brain for the foreign world of trading.
It Starts with Understanding the Relationship Between Emotion and Thinking
You are not a rational being who has some emotions. You are an emotional being who can be taught to think clearly under pressure. Contrary to what you would like to believe about rational thinking, all thinking (including rational thinking) is emotional state dependent. Emotions are inescapable. Any time there is a change in status in the market, there is going to be an emotion triggering in response to the change. So, the first order of business is the capacity to manage emotions – or they will manage your trading for short-term survival, which is not to your advantage.
Your emotional architecture is embedded in your body. So, emotions are biological first and foremost. Once triggered, emotions can grow to the point where they take over your mind and psychology. Understanding and managing your emotional nature is vital to your success as a trader. And that emotional mastery starts with emotional regulation.
Based on the understanding that emotions carry both a breathing and muscle tension signature, you can disrupt the revving up of an emotion like fear, anger, urgency, or greed simply by becoming mindful of your style of breathing and the tension you are carrying in your body – and then altering it. This will calm the emotion down so that it does not hijack your thinking. This is the gift of emotional regulation. If you cannot disrupt the force of an emotion, you will never get to the door of the mind. But emotional regulation is not enough by itself.
Applied Mindfulness and the Growth of the Intentional Mind
Rarely is the mind you bring to trading up to the task of trading successfully. Adaptation favors fight/flight responses to the danger perceived by encountering Uncertainty. Your body will always be biased to see through the eyes of fear, anxiety, aggression, lust, or greed when exposed to Uncertainty because it sees challenges as dangers to be dealt with or opportunities to be seized immediately. You will need to re-train the mind to engage Uncertainty from an emotional base of discipline, courage, self-soothing, and impartiality. This is the emotional base that brings forth a mind built to manage Uncertainty. This is the Intentional Mind. It’s not the one that you came stocked with when you began trading – but it is the one that manages the probability of Uncertainty for your long-term best interest.
The moment you encounter Uncertainty, there will be an emotional reaction. That cannot be helped. It is simply part of your human nature. However, with training, you can have a big say-so in what mind you bring to the management of that Uncertainty. The mind you need is one not based on winning or losing as a measure of your worth as a trader. These are things you cannot control. What can be controlled, though, is the mind you bring to your performance in the face of Uncertainty. With your Caveman brain calm, not concerned with living or dying, you can focus on what you can control – the mind you bring to performance.
This is the edge that carries you over the top. If your trading plan has a real edge in it, then the Intentional Mind gives you the psychological edge to execute your trading plan. This is what the expert trader knows. And what you can learn.