Learning How to Stop Impulsive and Over Trading and Achieve Your Potential

Articles on Trader Psychology by Rande Howell, Trader Psychologist




A Well-Planned Trade Goes Rogue

John was prepared.  After careful observation and charting, he planned his trade – and knew what he was looking to do.  And now he was going to trade his plan.  But first, before anything, he was going to attune to the markets (to get a feel for the markets) before he started looking for opportunities.  He brought his charts up and declared, “I am going to make money today”. He said it with the confidence of his winning mindset as he glanced at the P/L of his newly refreshed trading account.  Just sitting there watching the pre-market activity, John could feel the excitement building.  So much opportunity, and it looked promising.  And he was ready to take advantage of it.  This time he was going to build his account up – not blow it up.

As the market opened, he saw a few potential trades just take off.  “Man, that was sweet.  I could have ridden that one,” he muttered to himself as his excitement grew.  He imagined what the money would look like in his trading account.  It felt good. Then he saw another potential trade.  There was real opportunity this morning!  He hated missing opportunity.  And there he was sitting on the sideline while others were taking advantage of the action.  That got his competitive juices flowing.  Then another one came up.  Not willing to let another one get away from him, he jumped on this one.  Almost immediately, it took off.  It was like hooking a big fish – you just ride it.  Then suddenly it turned against him, heading for his stop.  He caught his P/L in the corner of his eye taking a nose dive.  John felt a surge of energy and resolve flow through him. “It’ll come back.  I’ll give it some more room.  I can feel it.”  So he moved his stop to let this one play out.  It crashed right through.  It stopped him out.

Now, he wanted to get even.  He quickly found another set up that looked good to him.  And he jumped in, ready to win and vindicate himself.  That trade turned against him almost immediately and stopped him out.  This time, though, he didn’t try to force it.  His loss limit reached, he realized he had just been sucked into a bout of over trading and revenge trading.  He was out of control.  It happened so fast that he didn’t see it coming.  This was the very pattern he was trying to change…over trading.

After he calmed himself down, he saw the past few hours completely differently.  He had not traded his plan.  “What happened?  What was I thinking?  These trades are not even in my plan. Why does this keep happening?”


The Anatomy of an Impulsive Emotional Hijacking

Let’s take a look at what just happened to John.  Over trading, or impulsive trading to be more accurate, is a common problem.  It blows up trading accounts too many times to be counted.  And yet, traders are baffled by this behavior and logically know they shouldn’t engage in it – but they do it anyway.  It is common wisdom that a trader needs to plan his trade and then trade his plan.  But just like John in the example above, traders end up jumping into trades that they have no business being in.  They know what to do; they just cannot do it in the heat of the trade.  It’s perplexing.  Then, to make it worse, they revenge trade as they try to make up for the problem their impulsive behavior caused in the first place.  So they compound their initial problem of jumping into trades with revenge trading – a terrible one, two punch.  And count our friend John lucky – he was able to extricate himself from the hole he got sucked into before it caused even more damage.

Notice, initially, John starts with the best of intentions.  He does his homework, studies his charts, and, you guessed it, planned his trade with the intention of trading his plan.  We know that he did not do that in the heat of the trade.  But we do know that he started out with a credible plan.  And then something happened.  But what?

He started out by attuning to the market so that he had a feel for it.  Then he took the first step into his personal abyss.  He declared, “I’m going to make money today.”  This is an affirmation and visualization that many traders make as they prepare for their day.  And it is a mindset that they keep engaging in throughout the day.  Their minds are focused on making money today.  You can hear the urgency – today.  Everybody wants to make money, so why not put it right out front of your mind?

The problem with this line of thinking is that you do not control whether you win or lose in trading.  If you keep pushing that you are going to win, when you have no control (absolutely none) over your declaration, what do you think is going to happen?  Your survival brain eventually rebels against you.  Either it has to swallow an untruth (that you can control winning) and acts as if you can force winning on fate alone, or your survival brain triggers to fear of trade entry where your magical thinking is going to be put to the test.  Either way, the winning mindset you bring to the act of trading is going to be rocked as the brain (and you) encounter the reality of unknown outcomes.  You may either jump into trades to avoid dealing with the uncertainty that simply will not go away or the survival instincts of your emotional brain may short circuit your pursuit of winning by freezing your capacity to act under the stress of uncertainty.

So right off the bat, after doing his diligent homework, John forces his brain to act from the declaration, “I’m going to make money today.”  He is forcing his brain to act as if he controlled whether he won or lost.  The survival instincts of his emotional brain already does not trust him to be in charge of the trading mind.  An emotional hijacking is being set up as he attunes to the markets with an aim of believing that he can magically invoke winning.  But that is not all.

John is an alpha personality.  He believes (as unconscious limbic learning) that his will should prevail (by force if necessary) and that he can make winning happen.  As a matter of fact, his vanity car tag is WINNER TAKE ALL.  He came by that attitude honestly as he was a self-made man, who pulled himself up from his boot straps and built a successful business in a very competitive industry before retiring.  And now he has focused that energy on trading. In his successful business prior to trading, he knew how to win, to make things happen, and (especially) not to lose.  It served him well.  Until now.

The Alpha Mind Meets Uncertainty

John’s identity is built around winning – not managing probability.  And in business, that alpha mind served him well.  His determined and forceful attitude molded a successful business.  The problem is that this mind, forged by winning in a competitive industry, did not prepare him for the environment of trading where randomness of the markets prevails.  Making things happen worked in past businesses where his positive and determined mindset appeared to help him control outcome.  But in trading, no amount of positive thinking, force of will, or winning ways made a difference in his trading outcome.  His brain was molded for one model, while trading required a probability mindset where successful traders knew that control over outcome was an illusion to be avoided.

The toughest part, though, was losing.  John hated to lose.  And that trait manifested when he revenge traded.  His grit simply would not let him lose.  He would work harder, do more, or attack even harder.  And that response to losing triggered in him the survival instinct of revenge trading.  He was going to get it back, not matter what.  The problem is that simply did not work in trading (as it had in his previous career). 

The alpha personality is so entrenched in a winning mindset that it is difficult to change the way he engages the new norm of uncertainty and potential loss.  Notice that John was prepared for the trading day.  He actually had prepared his mind for engaging uncertainty with the understanding that he did not control winning or losing and that losing well was a necessary skill.  However, it lasted only for a moment.  As soon as he had his charts up and began to look for set ups, he saw opportunity beyond the trades he had planned.  Then the alpha’s need to make things happen began wheedling into his mind.  He wanted to make things happen.  True alpha that he is, waiting for a set up to come to him simply got pushed out of his mind.  This is the hijacking.  His need to seize the day, to win by doing, felt energizing (a dopamine and adrenaline rush) and amped him up.  Suddenly he was the hunter seeking opportunity, rather than the ambush predator waiting for the market to give what it was willing to give.

And it took a toll on him.  He took the bait and jumped into a trade that went against him.  Then, out of a revenge motive, he took the bait again.  And his P/L suffered as he watched – and this antagonized him even more.  What I am asking you to see is the short fuse on the alpha’s winning mindset.  It happened so fast and the hijacking was so natural to him that he never noticed it - until after the damage was done.

So, What Are You Going to Do About It?

Emotional Regulation and Mindfulness are essential in working with the impulsive trigger of the alpha mindset. With breathing and relaxation skills (ER), traders learn how to slow emotions down, particularly primal emotions like lust (for winning).  John lusted after action to prove himself.  By winning, he created an identity.  And winning produced the dopamine reward chemical soup that made him feel powerful.  It is learning how to spot the build-up of chemistry before the hijacking occurs that is so important for managing an alpha’s mind.  Otherwise it is too fast.  It is a difficult situation to work with – but not impossible.  It simply takes work over time.  The impulse to act is there and it has been rewarded many, many times over the years.  So it will take effort to retrain.  But it is necessary, if are an alpha with an impulse problem who wants to become consistently profitable and stop blowing up accounts.

Learning how to use the tool of Mindfulness adds an important capacity to emotional state management.  In learning how to observe the emotional hijacking, you slow it down so that it is no longer going at the speed of electricity down a wire.  And you stop identifying with the urgency of your thoughts. In mindfulness, you are slowing the thinking behind the impulse down to a crawl.  Usually an alpha’s impulse problems are driven by a deep need to prove oneself and, therefore, matter.  That chemistry makes you feel powerful for a moment.  It’s addicting for the short-term focus of the emotional brain. The problem is that you have to keep the impulsive driven adaptation going by activating it.  Ultimately, that creates the trading account blow ups for which alphas are notorious.

It comes down to self-mastery.  In self-mastery, winning becomes focused instead solely on landing on the right side of probability and losing only means that you have landed on the wrong side of probability.  While trading, there is no thrill of winning, nor agony of defeat.  It was only probability – either way.  What matters is the mind you bring into the moment of performance.  This is the game changer.  It is the psychological edge where you are no longer proving yourself.  You are only performing.  That is the mind that gives you the edge that is really possible.  And it is yours for the learning.  A new kind of alpha has to rise from the impulsive blunders of the past.  This one is rooted in patience.  Instead of stalking opportunity, the new alpha waits in ambush for the opportunity to come to him.  Two different alphas. Are you willing to mold the old winning alpha mindset into the new probability alpha mindset?  Your performance hangs in the balance. 

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