Mastering the Mind that Engages Risk and Uncertainty

Articles on Trader Psychology by Rande Howell, Trader Psychologist




“I was doing fine until I upped the number of contracts I trade.  At first I was doing okay   at the new size.  I remember even thinking, ‘This is a piece of cake.  I got it.’ Then  the bottom fell out.  Not sure what is going on with me but I seem to be going back-wards this week.  I was just up and down all week and today I got frustrated and had a couple of discipline issues.  I quit trading for the day.  If my first trade is a loss I would drop back to my previous size to keep me from getting into real trouble”.  MG 
The Brain/Mind Prefers the Familiar Struggle rather than  Risking the Threat of the Unknown

     Why would you choose to continue doing something that causes you to stay stuck instead of trying something different that is better for you in the long run?  It does not make sense, does it?  Yet, when you look at the vignette of the struggling trader above, that is exactly what you see.  And his struggle with sizing up his capital as he gains confidence in his skills happens every day to aspiring traders.  He has become comfortable and competent at one level, but there seems to be a barrier to his moving to a higher (and more profitable) level.

     Looking at this conundrum from a logical point of view, it makes no sense.  But if you look at the situation from the emotional brain’s survival point of view, a different world shows up.  From a logical point of view, the trader knows that he needs to grow his trade size so that his earning potential matches the outcome goals he has set for himself.  Logically, he is only adding zeros.  That should mean nothing.

     Wrong.  When you are considering adding to the size of the capital you are trading, the emotional brain sees this sizing up as a risk to the short-term survival of the biological organism (you).  To the emotional brain the first order of business is self-preservation of the individual.  Adding more risk (capital) into the dangerous uncertainty is interpreted as a greater threat to life.

     Though the logical brain of the trader wants to grow financially by managing risk and capital wisely, the emotional brain of the trader wants no part of the danger of the unknown and the risk to survival.  The emotional brain will choose to stay small as a trader (and not grow in financial independence) over learning how to operate in a new environment where long-term probability of success at a higher level is achievable.

      In the case of the trader in the vignette, it means going back to the old familiar pattern of trading at the smaller size (though the situation is unsustainable long term) rather than creating a new comfort zone that manages greater size and greater reward.  The same emotional reasoning can be applied to hesitating at entry.  Think about it from the emotional brain’s point of view.  If you never get in the trade in the first place, risk is taken off the table without your ever getting into the trade and risking capital (life).  The emotional brain’s bias toward short-term survival and self-preservation trumps the need to enter valid set-ups (and manage the risk of uncertainty) for long-term benefit of a trading career with its resultant promise of financial freedom.

     Taking profits early follows the same design.  The emotional brain resists change and defaults to a successful short-term pattern of exiting a barely profitable trade rather than risking (“it could happen”) losing what little profit you have made.  Short-term familiar survival patterns,  based on self-preservation and fear of the unknown, trumps logical thinking about how to manage risk.

     This is the glitch that the trader has to solve, if he wants to grow his potential as a trader.   This is why real trading success is elusive.  You cannot out think the emotional brain.  You cannot strong arm it into submission.  And you cannot deny its reality if you want to be more successful as a trader.  Instead, you need to learn how to deal with it effectively.

Shifting the Brain from Survival Mode to a                                                                                Probability-Based Managing Uncertainty and Risk

     Left to its own devises, your brain will create a mind that is stuck in the familiar and will resist risking the unknown.  Yet, it is likely that you do not even see that as the problem.  In fact, most are confused by it and believe the answer is to try harder, and harder.  And even harder, until you are frustrated by your lack of progress despite all your hard work.  Hard work is not going to solve this problem of a self-preservation-biased familiar pattern trumping the creation of a probability-based mindset.

     The emotional brain is only trying to save your life, albeit from a short-term survival basis.  Until you learn how to see this bias in action and disrupt it, it will continue to run unabated.  Fundamentally, you will need to retrain your brain and mind to shift away from trying to control outcome. (Remember the emotional brain wants to control the ultimate outcome – your survival.)

     In truth, you were never able to control outcome.  It may have appeared that you could control outcome, but it was illusion in the long-term.  Control freaks often end up destroying (long-term) who they were trying to help.  Control over outcome is simply a strategy that may have appeared to work effectively in other endeavors in the short-term, but when applied to trading, the walls come tumbling down.

     Instead, traders who grow into consistent profitability accept that they cannot make things happen.  They cannot control outcome.  However, they have learned that they can control the mind that they bring into the performance of the trade.  This, they can control.  They learn how to let things happen.  In fact, they learn that they really never had a choice in the first place.  But by controlling their performance, they have found the edge. 

The Difference between Controlling Outcome and Controlling the Self that Trades

     One of the biggest differences is how much emphasis traders give their trading account in the short- term.  Inconsistent traders are looking at their P&L constantly during a trade – looking and reacting to every micro-moment.  They are focused on outcome, not process.  The professional trader is assessing the state of his mind as he trades.  He has learned to determine whether or not he is in the zone.  He knows he does not control the outcome of his trading account.  But he does control the process of managing the trade.  If he can do that, probability is on his side.  And he becomes comfortable with that.

     Winning or losing takes on different meaning for the professional trader.  Whether or not he wins or loses is not the point.  The point is: did he control the mind he brought into the moment of performance?  If he does, he knows that winning or losing are simply probabilities that will favor him over time.  Therefore, he does not get very upset if he loses, nor does he start getting excited when he wins.  He knows it is only probability expressing itself.  When he wins, he knows he did not make it happen.  He was never in control over outcome.  He was only in control of the mind he brought to the management of uncertainty and risk. 

     This is the mind that masters uncertainty and risk.  A paradigm shift is required in mindset.   A trader’s biology and psychology will steer him into a world of pain as long as he attempts to control outcome.  Letting go of outcome, the trader manages the process and allows the numbers to fall where they may.

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