Articles on Trader Psychology by Rande Howell, Trader Psychologist
“I know better than this. But once I lose (or even look like I’m going to lose), I am compelled to catch up no matter how much logic tells me different. I don’t even see the urgency arise in my mind – I’m blindsided by it. By looking at the health of my trading account, it’s too late then. But there it is, I’ve got to make up for what I’ve lost – I hate losing. And, in that moment, I believe I can make it happen. Then, my anger grows more as I am confronted with my lack of control. That’s when I spiral down and blow up my trading day. I keep telling myself that I know better, but there is a growing helplessness demonstrating I don’t. I’ve tried everything. This is where I’m stuck – and for a while. I keep saying, next time I’ll do better – but I don’t. I keep doing it. If I could master this part of my trading, I’d be doing well.”
In the Blink of an Eye You Lose the Battle of Wills
The above is a direct quote from a trader named Mark that I received recently. Mark was mystified by his continual performance collapse when dealing with his unwillingness to experience a loss (though he knows better). The typical lofty advice to this trader could be simple – quit throwing money at high probability losses (just be logical). But he’s heard that sage advice a thousand times before (as thousands of other traders have) and it did not result in a change in his trading behavior.
It’s like two competing minds are struggling for control over the trading mind. One keeps winning the battle of the minds while the other continues to fiercely struggle in a fight he does not even know he’s in. On the surface, it looks so straightforward. But the trader’s emotional reaction paints a very different picture.
The mind governed by Logic is the one that you know about – you know what to do, just do it. It is also the one that makes trading look terribly easy, except when those pesky emotions get in the way. It is the one that understands intellectually that trading is a numbers (a probability) game where no one trade makes a difference. This Thinking Mind “knows” how to trade, but is incapable of executing a plan when the money and risk are real. Instead, despite all that knowledge of trading, it falls apart in the heat of the moment. For the Thinking Mind cannot use that knowledge of trading in the midst of the challenge of performance. And the trader (Mark in this case) keeps looking for thinking errors to be corrected through the use of Logic, rather than being open to emotional learnings that have to be relearned at a synaptic level in the brain’s response to uncertainty and risk.
Get tighter on this last sentence and read it again. [And the trader] “keeps looking for thinking errors to be corrected, rather than being open to emotional learnings that have to be relearned.” The Logic makes it seem right – correct the thinking error and push emotions aside. Again and again, the trader keeps stepping into a world that he is ill prepared to deal with. He uses skills that no longer work. In fact, he does not even recognize that the problem is with him and he continues to try to push his old way of doing things on the new world of managing uncertainty.
What is he unable to see? What can possibly be sitting right in front of him, yet he does not see? You would think that the trader would want to solve this problem and move on into the richness that trading offers. But he stays stuck and does not understand why he keeps blowing up capital. It’s almost like there are two traders, each with a different competing agenda. And what the trader does not understand results in ruining his capacity to trade successfully. This, by the way, is called a cognitive bias. You don’t see the bias in action because it is assumed to be true and is not questioned. In the tunnel vision of the cognitive bias, the performance mistakes keep happening. Yet, you (the trader) keep falling for the same trap (that’s the cognitive bias) – this is the story of the human brain on trading.
So what is going on here? This is a super smart guy. And he is super competitive. He has demonstrated success in several other businesses that he continues to manage at the same time he is failing in his trading business. It makes no sense to Mark’s driven alpha personality. How can he be so successful in those businesses and fail so miserably in his trading performances? The amazing part is that this trader’s problem is happening faster than the blink of his eye (literally). Let’s take the mystery away now.
Two Brains Working Simultaneously with Completely Different Agendas
Mark, the trader in the vignette is a prime alpha. He is a winner with a track record that would prove his mettle to win at the game of life consistently. So, what stops him from applying his proven skills in producing successful businesses to trading – and result in winning in trading? It just seems so intuitive that this should be true. This is where his need for control gets in his way. His need for control is both biological as a trait that is genetic in origin and psychological where a winning (conquering) mindset was learned. He is used to winning (controlling outcome) by sheer force of will and a positive attitude.
This mindset was learned as he grew up in a highly competitive family where finishing second was considered losing. And he rose to the occasion based on the environmental pressure of his formative period. Whether it was sports, girls, academic, or interpersonal leadership – he brought this competitive (got to win, cannot lose) mindset to bear. And it brought him success and status. Alpha. He was the embodiment of the Alpha personality. And it worked in the relatively small world of his community. And this is the mind he brought to decision making in trading. He was no longer a big fish in a small pond, where the appearance of control was possible. But trading in the markets opened up a completely different world for him to engage, where his control was an illusion, no matter how much will and personal power he employed.
The mold had been set psychologically in his formative period. He saw through the eyes of the Alpha Male and there was no stopping him in the beliefs that drove his actions. By sheer force of will and competitive furor, he had learned at a very primitive level that he could make things happen HIS WAY. Trading should be no different than any other endeavor he had encountered. Until it was not.
The New Reality vs. the Illusion of Control
In his trader training, he understood (on a logical, thinking level) there were going to be losses – it was just part of the game. Thinking produced an abstraction that was separated from the survival instincts that sit behind every decision involving uncertainty and risk. This is knowledge every trader learns on a logical level, but not a survival level. And this is the problem. In simulation, he could see those points and take the loss. This is termed intellectual understanding.
The harder part is limbic understanding – and that is what this trader was missing in the way his brain was shaped by experience. For his emotional response to engaging uncertainty and risk simultaneously resulted in his learning fiercely to conquer all doubt and bend reality to his precepts. Unfortunately, the rules of engagement that worked in the small world of his personal life had no correlation to the rules that governed randomness on a large scale. Unknowingly, he kept trying to force his subconscious (limbic learnings) rules learned in his family of origin onto the vast world of the markets.
Unfortunately, Mark saw those limbic learnings simply as the truth – and not a particular organization of the Self. He was not taught to “see” cognitive biases at play in the way he understood the world. In the unquestioned belief system into which he had fallen – he could make things happen and he could change the course of winning and losing. And he hated losing. So, an enormous amount of his personal energy was focused on turning “lemons into lemonade”. Those same unquestioned beliefs that drove his performances successfully in his other businesses now turned against them.
Mark’s story is similar to any trader who has difficulty taking a loss and translating it to an expanded understanding of peak performance in trading. Losses are simply landing on the wrong side of probability, rather than something that can be avoided. This is the probability world that few traders learn how to “see” as normal. Traders’ biases keep them stuck in avoiding what cannot be avoided and also keep them focused on what they cannot control – winning. It’s a formula for disaster. And it is played out every day in your trading.
Much like losing, winning is only landing on the right side of probability, relative to your bias. It’s also something that you (as a trader) cannot control. And Mark pushed this position from his success in business and athletics into trading. He could not get past his bias towards winning and not taking a loss. It’s not like a logical explanation can help. In his mind, he has demonstrated the control over outcome in business and sports that he seeks in trading. The bias is there, blinding him on a subconscious level, to the truth of his having no control over outcome. Yet he persists. This is the power of limbic learning. It produces a bias that is incredibly resistant to change. Thinking is wasted here. What the evolving trader is seeking to change is the fabric of how his/her emotional brain has organized the response to uncertainty and risk. What Mark has not grasped yet is that he was not allowed to lose growing up in his highly competitive family. Winning (and forcing losers into winners) was simply the rules that governed the way he engaged the uncertainty of winning as a member of his competitive family. And it worked for years (to some degree)…and then he ran into trading. This is where the unquestioned biases, learned in his formative period, came to haunt him. Ultimately, he only had the appearance of control – the illusion of control. The problem is that he cannot see that his perception is driven by a cognitive bias that no longer works.
My question to you is this: Are you willing to challenge your understanding of winning and losing (and really change your historical beliefs) to become consistently profitable in your trading? Or do you need to win? Your trading account is keeping score, not your attitudes about winning and losing. Your trading account will expose the biases that drive your trading performances. Become a student of these personal biases.