Articles on Trader Psychology by Rande Howell, Trader Psychologist
When there is a gap between your potential as a trader and your results, what does it really mean for you to take responsibility for your lack of performance? For most, it means you take full ownership of both the good and the bad in your trading. First, you look outwardly for the answers. (I mean, it couldn’t be you, right?). And you collect lots and lots of stuff looking for the answer. But that grows old because the results don’t change. No matter where you go – there you still are. Same old you; same old results. The intoxicating glamor of financial and personal freedom seems forever just-around-the-corner. You still want it, but it still stays out of reach. And you don’t know why.
Then, if you have survived this long, you begin to actually quit chasing the story of the holy grail of trading, looking for a fix to your problems in the marketplace of stuff. Instead, you awaken to the realization that the problem is “in there”, in your head, rather than “out there” in the markets. The glitch holding you back is you – the trading psychology and evolutionary psychology you bring to the game. Ownership has taken you this far, but responsibility has more to it than just ownership.
Responsibility and Response-Ability
Courageously taking total responsibility takes you to your emotional nature. And your emotions reveal your response-ability to Uncertainty. Why? Because emotions ARE your ingrained responses to Uncertainty. Not only Uncertainty, but your emotions are your learned responses to winning and losing (and boredom also). Your current emotional constitution is your response-ability to the world of Uncertainty. Uncertainty found in trading. And your P&L statement cuts to the bone. It tells you (despite the alternative reality you would like to believe) how effective (or not) your current emotional response-ability is for success in trading.
Unfortunately for people who are pursuing trading careers, the brain (that’s where the emotions are) that you brought to trading is not going to bring the success you are seeking. Evolution bequested you an emotional brain grounded in fear of the Unknown (Uncertainty). The emotional response-ability that evolved to meet the challenges of living for our Caveman ancestors is diametrically opposed to the emotional response-ability needed for managing the probability-based world of the financial markets. Uncertainty, being out of control, to our Caveman ancestors was linked to a biological threat to his or her existence. It was a dangerous world and the brain carved our emotional nature (our response-ability) to meet the demands of that world. And that is the exact brain you bring to trading – where the rule is Uncertainty. Literally, trading represents the worst nightmare imaginable for our inherited Caveman brain.
“Everybody has a plan until they get hit in the mouth” – Mike Tyson
You experience this phenomenon every time you cannot pull the trigger. Asking for more and more confirmation (just to be sure) so that you can have more control over outcome. And it’s the same with taking profits early – if you let it ride, you could lose everything. Or when you take a loss and you are compelled to make up for that loss or losses – despite “knowing” that no two trades are linked and are really random events. This is the programmed, primitive, and instinctive response-ability of your Emotional Brain on stress. Until you are ready to reprogram instinctual emotional programs built to trigger to Uncertainty, success (consistent profitability) will remain out of reach. Your will-power is going up against powerful instinctual emotional programs that are hardwired. These ancient emotional programs will simply hijack your Thinking Brain when put to the trading stress test that you probably experience every day in your trading.
Along with this pre-programming that you come stocked with, you also have personal psychology that is shaped as your brain, remarkably unfinished at birth, experiences and adapts to life in its family, culture, and circumstance. The brain is seeking short term survival and develops patterns (emotional learning) as it experiences the world. These patterns become fixed over time. They adapt us for short-term survival within the context of family, culture, and circumstance. You may experience this learning as scarcity thinking, where you believe that what you have can be taken from you if you risk. Or you learn that losing is bad and making mistakes (losing) is no longer just about your competence in performance, but a reflection of the Self. I just lost; therefore, I must be a loser. This becomes locked in as a belief that is projected onto the markets – and then into your trading account.
On the other side is the deeply ingrained need to win. Winning becomes (psychologically) who you are rather than competence in performance. And the belief becomes: to matter as a human being, I must win. This is a dangerous belief to bring into trading, where you do not control whether you win or lose. Out of that eagerness to engage, make things happen, and win – many an account has been blown. That urgency to act (so useful to Caveman and so empowering as a psychological skill) motivates traders to get into trades that are not in their plan. Then when they lose, a strong desire to make up for prior losses emerges to control the trading mind. What was so good in one domain (say business) has become a liability in another (trading). It is the response-ability that has to change (i.e. how do you respond to challenges). An emotional response that is good in one environment may be bad in another. The emotional responses to Uncertainty have to evolve for you to build success as a trader.
Changing the Brain that Trades
The link between responsibility and response-ability is apparent. You need to take responsibility for the mind you bring to trading. Otherwise, your trading will sooner or later pronounce you DOA (dead on arrival). Viewed through the eyes of adaptation, your present organization of your response-ability was once useful. It solved a problem and then was wired into neural pattern. Later, that same effective solution is tried out in a different area (trading) and it is lacking. Now is the time to take responsibility for the mind you bring to trading. It is time to evolve the emotional response-ability that once worked into a new response to engaging Uncertainty. Fortunately, you have the ability to do just that.
It starts with the recognition that nothing is wrong with you. In fact, a lot is right with you including the capacity to change the way you respond to Uncertainty, winning, and losing. And the second thing to grasp is that “you” do not have emotional patterns that evolved to serve you for short-term survival. They have you. Your brain created them in response to needs in the world in which you are a part. Then, once on automatic, they (and their response-ability) began to create you. “You” had very little to do with it. And that has to change.
It All Starts with Breath
Emotions may drive our responses to changes in the trading environment, but they are biological. They are not psychological. They take over the mind and your psychology under stress. Because they are biological first, they will have a breathing signature and a muscle tension signature. This signature, once learned, can be used to interrupt and to calm down your emotional nature or your response-ability. By learning how to bellows breath and to drain tension from your major muscle groups, you can become the designer of how your emotions respond to Uncertainty and stress. Nothing happens until this step has been learned and becomes part of your emotional response-ability.
Establishing a Mindfulness Practice
Instead of becoming caught up in thoughts or impulses, you need to learn how to observe them. Most traders remain fused to their thinking and, because of that, they are easily hijacked into ruinous results. Learning to step back out of thoughts puts distance between you and your thinking. As this happens, you come to realize the powerful responsibility that humans have. They can become designers of the Self that trades. You and your thoughts are not the same. It’s a powerful distinction that opens the door to reorganizing your mind to become a more effective trader.
Waking Up Your Empowered Potential
Even though your brain (and hence your mind that emerges out of it) is organized around fear as the most basic emotion that shapes your thinking, so much more is possible. In the same way that fear, anger, greed, anxiety, and over-eagerness are hardwired into our emotional responses – they do not necessarily define our potential responses (our response-ability) to Uncertainty. With training you can train the brain to respond to Uncertainty from the emotional programs of discipline, courage, self-compassion, and impartiality. It’s not the emotional palate that Nature bestowed upon us. But they are possible. It’s a matter of commitment to personal development and training.
Fortunately, your brain is rooted in neural-plasticity. The brain can change. And it is a lifelong learner. Your job as a trader is to take the old emotional learning that you inherited from your Caveman ancestors (evolutionary psychology) and your extended family and retrain it to engage Uncertainty effectively. With some courage and disciplined effort, your brain can build new pathways that lead to a disciplined mind that can truly plan your trade and then trade your plan. With this psychological edge, you can then exploit the statistical edge you have in your method. This is the mind you need for trading. It’s not the one you came with, but it is possible. It is a matter of truly becoming human. You can overcome the old limbic learnings that hold you back. That is the power invested in you as a human. Take advantage of it.