Mastering the Urgency to Over-Trade

Articles on Trader Psychology by Rande Howell, Trader Psychologist




You Can’t See What You’re Blind to

How many times do you experience the following?  You’ve got your plan and now you are going to trade your plan.  You know the drill.  It’s the right thing to do – and you know it.  This time you’re going to do it.  You are determined.  Then you start looking for set-ups that stay within your plan.  That’s what you should do.  But if you’re having a good day, you want more.  If you’ve taken a loss, you want to get it back.  Ready for action, you wait and don’t see anything forming anytime soon (boring), but some interesting stuff starts appearing elsewhere.  And it’s caught your eye (excitement – escape from boredom!). 

You decide to check it out while you’re waiting.  There just might be something here ripe for the picking – you think to yourself.  The shift in mindset happened so fast that you didn’t see it happen.  Something triggers and potential set-ups start appearing – as if by magic.  It’s time to make some money (and escape boredom)!  The discipline of trading fades as the growing urgency to make some money moves to the forefront.  And you’re going to miss them if you just sit there.  You are now flush with anticipation.  You’ve got to seize this moment.  Urgency slips, like a thief in the night, into your mind.  You feel a rush of adrenaline as you ramp up while watching set-ups form.  You just need to jump on them while the getting is good.  You feel alive.  Before you know it, your trading plan is history and your trading becomes a free-for-all. 

The confidence and discipline to trade your plan disappears like a mirage.  Your attention is so riveted on the action in front of you – that’s all that matters now.  The excitement fuels the over-confidence that leads the charge – you are going to make some money today!  Time melts away.  You’re on the upside for a while, feeling like you are in control, then it crashes.  Uh oh, not you gotta make it back!  At least back to breakeven.  After the smoke clears, you give back all your profits.  And then some.  Well, you did it again – and it’s not the first time.  What happened to the discipline that you promised yourself?  It’s a pattern of reckless behavior you’ve seen before.  You got carried away by the excitement and the allure of making money.  You lost your way – got pulled from your plan.  You became a gambler rather than a hunter patiently waiting to see what the markets would give you.  You went out to take it.  And you got burned.

Making the Same Mistake Over and Over Again – What’s Happening?  

The scenario above happens every day to traders.  I heard this one while I was debriefing a trader’s psychological meltdown leading to a serious drawdown this past week.  Many traders will comment when reading my articles or viewing my webinars, “He’s talking about me”.  It’s common.  It’s an example of an untrained brain engaging Uncertainty, the trader’s beliefs and biases, and the excitement of risk.  It’s not fear-based – at least not in the beginning.  But after some serious losses, over-trading can traumatize the trader into becoming highly sensitive to particular moments – like trade entry.  The brain learns that entering a trade can produce bad things so it forms defensive patterns that stop the trader from entering trades.  But then when the trader misses out on the opportunity, he pushes past the fear and jumps into ill-advised trades that further strengthen the reactive emotional pattern. 

If over-confidence is so common and damaging, why do traders keep falling for the same trap?  Because they are blind to what they don’t know.  All they experience is that it feels good and they want more of it.  Plus, it’s an escape from boredom, which is uncomfortable.  Therefore, they do not see it creeping into their mind and taking over because it feels good.  And who doesn’t want to feel good!  And they do not have a mind built to learn from experience.  They avoid taking a loss, which makes the loss worse.  And because of their avoidance, they are locked into neuro-patterns that trigger automatically and reactively without the trader’s knowledge. 

In Trading, Your Reward System (Feeling Good) is Your Enemy

The biology of emotion and the psychology of mind are interwoven.  In habit formation, of which over-trading is an example, your body’s reward system is working against your long-term best interests.  Every time you have a positive outcome from a behavior, you get a little shot of either dopamine or endorphins.  These are chemicals that make you feel good – which is a strong reward for the behavior (over-trading).  Once these chemical rewards are triggered a few times, a neuro-circuit forms that cements the habit into automatic and reactive responses every time you experience Uncertainty.  They allow you to avoid the discomfort of the brain encountering Uncertainty.  This is trouble brewing.  Feeling good and escaping from boredom while trading is dangerous to the health of your trading account.

Feeling good (or what is known as euphoria in neuro-biology) makes you feel confident and you believe that you are on a roll and the good times are going to roll on forever.  That is dopamine talking to you – not the truth.  But you are seduced into believing it is the truth.  Plus, the chemical fix allows you to escape boredom.  Everything becomes exciting.  All those trade possibilities start appearing to your mind, but your mind is being cooked by dopamine.  Opportunity seems everywhere.  And you are excited.  Your psychology is overwhelmed by this ancient reward/pattern formation system of the Emotional Brain.  The Thinking Brain (so necessary for effective trading) has been chemically altered by the dopamine without your ever noticing it.  The feeling good of over-confidence has hijacked the mind you need to manage the Uncertainty of probability.  What you notice, after the fact, is that you entered trades that make no sense after the rush of dopamine wears off.  And then you come back to your regular psychology.  This is the danger of feeling good while trading.

Getting Back Control of Your Trading Psychology

Most people think that they are having trading psychology problems when they experience these over-trading problems.  The truth is that they are having biological problems that lead to the psychology problems.  Emotion overwhelms thinking.  And there is no escape from emotion’s influence over thinking and perception.  However, although there is no escape FROM emotion – you can cultivate mastery OF emotion.  And it starts by acknowledging that emotion is biological (of the flesh), and even though it is not psychological, it takes over your trading psychology and dictates what you think – all without your ever noticing it.

Under the influence of over-confidence (dopamine), you get excited about the possibility of success – even convincing yourself that winning is right around the corner.  You would experience this over-confidence in your body by the way you breathe and the way your body is holding tension.  Think of excitement – what does your body do when you get excited?  How do you breathe?  What muscle groups get tense?  Then notice that urgency shows up as the emotion arouses.  And at a particular moment, a switch goes off and stress hormones are pulsing in your body.  That chemistry also alters your psychology.  Your trading plan, from this point of view, is too slow and gets in the way of achieving success in the moment.  The rational mind is washed away by the euphoria of over-confidence.  And you have just been shot out of the saddle, again.

How do you spot an emotional event and prepare for it?  Practice the bellows breathing that I talk about.  The way you breathw will alter the capacity of the emotion to take purchase and take over your mind.  The key here is to notice the emotion at the point of boredom.  The boredom of patiently waiting for the trade to come to you leads directly to the runaway freight train called over-trading.  Using emotional regulation, you can interrupt the boredom moving to excitement patterns that moves you into over-trading.  Keeping control of the arousal of the emotion by emotional regulation allows you to take back control of your emotional response to boredom and the urgency to escape boredom that is the precursor to over-trading. 

Set a plan to observe for boredom and the need to win.  Notice the boredom and the brewing urgency and regulate it.  What’s boring about maintaining patience?  That is exactly what you are looking for.  You need to observe the beginning of the emotion of euphoria and the beliefs that drive you to want to “do something”.  That need to do something is going to get you into trouble in trading.  Find the courage to turn toward the need to escape boredom.  You will find the road to freedom here.  Instead of boredom as an emotion, you are seeking watchful waitfulness.  This is what you seek instead of excitement.  Interrupting the emotional pattern is the first step in a process of changing the way you interact with Uncertainty.  Without regulating your emotional nature, getting to the mind where your beliefs are housed is not an option.  Start here.  Regulate the emotion.  And notice that the emotion triggered a long time before you realized you were in trouble.  Take the first step.
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