Articles on Trader Psychology by Rande Howell, Trader Psychologist
The gap between your desire to trade successfully and actually trading successfully is directly related to your willingness to embrace change - particularly, your understanding of winning and losing. Without knowing it, traders stand in their own way in the journey called trading. Though they try hard and then even harder and harder to win, they stubbornly refuse to see the real problem in their trading. And they wonder - why can’t they simply plan their trade, then trade their plan?
Instead, they sabotage themselves just at the moment when things are getting hopeful. But here’s the real problem – the mind that they have brought to trading is not going to produce the kind of success they are seeking from trading. It usually takes 3 – 5 years for a trader to finally figure out that they are the weakest link in their trading system. Unfortunately, most traders have been forced to exit active trading by this time because they have run out of capital or time.
Here is an email I received earlier this month as a typical example:
“I just found you on UTube. Man, you nail it. I watched a ton of your videos, and you describe me to a “T”. It’s like you were talking directly to me. I wish I had met you five years ago when I still had enough capital. But back then, I earnestly believed that success was right around the corner. All it was going to take was a little hard work and learning a trading system. It never occurred to me that I was the problem in my trading. Through the rearview mirror, I see that clearly now. I was always looking for the next big thing that would take me over the edge. I never realized that my psychology of trading was the next big thing. It was staring me in the face, but I refused to acknowledge it. That kind of thinking got me into a heap of trouble. Now I can’t afford you.”
And what is the problem with the mind that you brought to trading? At the very bottom that mind (that you call ‘YOU’) is deathly afraid of failure. Your identity, your value as a human being, has been linked to how well you avoid failure. Have you ever traded “not to lose”? Most traders do. Have you ever let a perfectly good set-up pass because you wanted more confirmation (just to be sure) and by the time you got the confirmation, the trade was gone? Or have you ever moved your stop because you didn’t want to take a loss? Even more, have you ever revenge traded – wanting to make up for prior losses? These are common performance problems in trading that all evolving traders have to master. If you have acknowledged the pattern of mistakes you keep making, you have met your own version of fear of failure.
Your Primitive Caveman Brain Is Going to Kill Your Chances of Success
The real problem in trading performance psychology is that your performances (winning and losing) have become associated with the core of your being and have become the measure of your worth as a human being. If I win, I feel good. If I lose, I feel like I am a loser. Notice that association. You do it enough (the neurons that fire together, wire together) and you develop a connection that associates taking losses with being a failure. A performance (winning or losing) or even a series of performances becomes the “truth” of your being. In today’s world, this linkage of performance and being is dangerous for the trader.
To our distant ancestors the linkage between performance (winning and losing) and identity (worth) was deeply intertwined. In the dangerous conditions of that bygone world, failure meant death. To fail was not about your tiny ego being bruised. It was survival – or not. If you were in a tangle with a saber-toothed tiger, failure (taking a loss) truly meant that you experienced loss of life. From the dangerous world of our caveman ancestors, where there was a 95% failure rate, humans developed a powerful instinctual aversion to failure and taking losses.
That aversion was so successful in keeping our ancestors alive that it got incorporated into our DNA and became the genetic predisposition that you brought into trading – without ever knowing it. That evolutionary psychology (instinct) gets activated every time when you experience Uncertainty with capital (life) at risk. Suddenly the Thinking Brain gets shut off when you anticipate the potential of failure in your trading. This is the predisposition of your Evolutionary Psychology acting on assumptions that are no longer relevant. Then add the development of your personal psychology around winning and losing from your family, culture, and circumstance, and you have a serious impediment to your development as a trader. One that you rarely solve by yourself.
Traders bring a bias to “win and not lose” to trading. Yet they have no direct control over whether they win or lose. And, therein, lies the problem. But they continue to push winning as measuring their worth as a human being. If they win, they are large and in charge. They have the stuff. They have value because they have made money (power to the caveman). If they lose, they are a Failure as a human being. And failure means the threat of death. This is what is going on in the Emotional Brain – the one we share with our caveman ancestors. It is no wonder why there are so many performance problems in the execution of a trading plan.
Separating Performance from Your Value as a Human Being
This is the essential job of a trader from a psychological perspective. The best you have in trading is an edge over time. You have no control over winning and losing. In fact, going in, you know that you are going to be taking losses regularly and its just part of the business of trading. That’s your Thinking Brain talking. Your Emotional Brain sees it quite differently. And if the Emotional Brain gets stressed (facing a loss), it simply shuts down the Thinking Brain from participating in your response to managing the Uncertainty of the situation you are dealing with. It’s that simple. The Thinking Brain talks a story of managing risk and probability. The Emotional Brain, meanwhile, is in a struggle of life and death. And who do you think wins that fight?
What has to happen is that you manually have to do the heavy emotional lifting that separates performance (which is about competence – which you can improve from the experience of failure) and your worth as a human being. Just because you lose does not mean that you are a Loser. It simply means that you landed on the wrong side of probability relative to you. The cause of that could be a method mistake, a psychological mistake, or it could be just probability.
Either way, it is not about your inherent worth. It is about your competence as a trader. And that can be improved. And, in fact, your brain only learns from failure (not success), so the loss invites you to examine the trade to find where to improve yourself as a performer. Without failure, in this way of thinking, there is no potential improvement. We learn from our failures. Failure means that you as a human being are actively adapting yourself to this world of trading in which you are embedded. You need the failure in order to improve.
That is a far cry from taking a loss and deeming yourself a failure. No wonder you fight back and cut bait and run. Staying stuck in your caveman’s way of interpreting failure is going to keep you on the endless treadmill. My invitation to you is to invest deeply in accessing your inherent worth and bring it into the light of your awakening awareness. It is here that you separate performance from your worth. It is the door that you need to find and pass through. Trading is then just trading, and not a potential condemnation of your being. What you will find is relief. All you have to do is develop the mind that performs in the conditions of Uncertainty. That is a skill that can be taught.
Think about the last time you beat yourself up after taking a loss. Did it help? Or course not. But it did dig the problem even deeper. If, instead, you were compassionate toward yourself when taking a loss, you would discover that your mind becomes open to learning. Why would you do that? Because, at the core of your being, you are worth it. That is where the successful trading mind starts.