Articles on Trader Psychology by Rande Howell, Trader Psychologist
On paper, trading looks pretty straightforward. You’re taught to develop your knowledge of trading, face the learning curve, and muscle your way to success. All you have to do is follow your rules and your edge will take care of business. And as long as real money is not being risked, that kind of naïve thinking produces handsome paper profits. Success is so close; you can smell it. All the trader has to do is transfer his or her skills from paper profits to real profits. That’s where the mental exercise breaks down. When the money is real, the game changes. Suddenly there is no longer a reset button for the video game called trading. The risks are real (that is your hard-earned capital that you are really, really, really risking). You take a loss and watch that capital disappear. Poof. That’s when your ancient survival instincts kick in and trading is no longer easy.
This time there is no reset button. Your mental game breaks down. That’s when your mind starts playing tricks on you. It does not have to be a significant loss. Surprised because of the small size, many people experience this mental breakdown in discipline even with minis. Not much money, but it was real – that’s the point. Somewhere between risking no real money while playing your personal video game of probability and risking (even a small amount of capital in the overall scheme of things) real money to an uncertain future that you cannot control – your mental game collapses. And you didn’t see it coming until after the damage was done. Whether you triggered to the avoidance of fear (being too scared to trade or taking your profits way too early) or to the aggression of anger (need to get your money back by over trading or revenge trading), the result is the same…a paralyzed mind just when you most need it in the heat of the moment.
Your mind may be willing to trade and intellectually you know how to trade (knowledge of trading), but your flesh is weak. Your biology (flesh) has a totally different agenda than your Thinking Brain. And without understanding and then managing the biology of your Emotional Brain and its survival instincts, you will never be ready to consistently perform well when the money is real. Instead, you choke or experience an emotional hijacking that wipes out your mental game. But why?
Your Silent Partner (Caveman Emotional Brain) Has a Different Agenda than You
Your Thinking Brain (the one you want to trade with) grew out of your Emotional Brain (instinctual and survival oriented) like a tumor (not very glamorous, I know). Consequently, the communication networks from the Emotional Brain going into the emerging Thinking Brain are rich. But the communication back from the Thinking Brain to the Emotional Brain are sparse. And under the pressure of Uncertainty the sparse communication network gets shouted down in the roar of the Emotional Brain’s response to Uncertainty (danger). The clarity of your thinking is compromised just when you need it most. As a trader, you experience this mental takeover in various ways.
After taking a loss or a series of losses (particularly a big one) you may develop a fear of loss that keeps you from even pulling the trigger. To the instinctual survival-oriented Emotional Brain, not getting in the trade in the first place is a victory – it kept you (the caveman) from even getting close to the perceived biological threat of risking capital. Remember, the Thinking Brain has only skinny communication back into the Emotional Brain (also known as the Survival Brain) while the Emotional Brain has vast neural networks going into the New Brain. Hence, the Thinking Brain gets shouted down (listen to all the mental chatter in the mind) by the Emotional Brain as it tries to make a logical risk with a high probability of success.
Or the opposite can take place. You take a loss or a series of losses, and you are compelled to get your money back. Suddenly aggression takes over as the Emotional Brain is motivated to beat the perceived biological threat into submission. Logically, you know that the loss simply represents the cost of doing business in trading and your job as a trader is to keep that loss small. But your primitive Emotional Brain does not see it that way – it sees the loss as a direct biological threat that has to be neutralized, because it is threatening you. This is instinctual. And it is the way of your flesh (biology). Under the stress of trading (risking capital to an uncertainty outcome), the survival instincts of the Emotional Brain simply silence the participation of the Thinking Brain in the decision making and execution during the performance of trading. And your mental game collapses.
If you are going to master the mental game of trading, it is this aspect of your inherited survival instincts that are going to have to be retrained. The reason so many traders wash out of trading is that they refuse to take on the responsibility of training the brain and the mind to work with Uncertainty and Probability, which is very different than the way evolution originally built you. Trading is spooky business for the Emotional Brain. It was not built to survive in a world of probability. It was built to be certain of the control of outcome, of not being wrong, and predicting consequences. The problem is that you, as a trader, cannot control outcome or predict (with certainty) the future – and you are going to be wrong a bunch of the time. So how do you prepare the mind for trading?
The Brain is Emotional First – Deal with It
Fear, Anger, Greed, and Lust are simply part of the emotional soup from which the trading mind emerges. Other parts of that emotional soup are Discipline, Courage, Self-Soothing, and Impartiality. The problem is that the first four are instinctual responses to Uncertainty – they trigger immediately when exposed to the Unknown. And the instinctual Emotional Brain has all that hardwired communication network moving into the Thinking Brain. So survival instincts are much faster than other, more healthy, responses to Uncertainty and risk. And they will dominate, if left to their own devices.
Yet, with training they can be calmed so that they do not hijack the Thinking Brain under stress. But the brain does have to be trained into this unnatural response. This is where Emotional Regulation training is essential in the evolution of the trading mind. Because your emotional nature is biological in nature (the flesh), emotions will have both a breathing signature and a muscle tension signature. You will hold your breath or have a fast shallow breath when stressed. This is emotional arousal and it can be interrupted by altering the way you breathe under stressful conditions and the way you release muscle tension. Literally the body cannot maintain the big four instinctive emotions when exposed to bellows breathing. This is a critical first step. It will not change the underlying belief behind the presenting emotion. But if you cannot manage the emotion first, you will never get to the door of the mind – this is where the core beliefs about your capacity to manage Uncertainty are housed.
Mindfulness – You and Your Thoughts Are Not the Same
We often think of “my thoughts” as if your thoughts were, in fact, actual representations of the Self. They are not. Your thoughts and beliefs are simply the emotional programs of the mind that have been given voice in your mind. Those emotions and the mental chatter in your head represent limbic (emotional) learnings. Your brain literally adapts to the world into which it is thrust. They are not your thoughts. They are not your beliefs. They are simply the adaptations the brain made or inherited from history or learned from experience. In fact, you do not have thoughts and beliefs – they have you.
This is crucial information. “You” represents simply one iteration of the potential within which you exist. And the current organization of the Self that you brought to trading is rarely the one that will bring success in trading. The Historical Self was built for you to survive the world within which you adapted. The good news is that as you develop Mindfulness and stop identifying with your thoughts and beliefs about who you are, you can begin to redesign the mind that you bring to trading. You move away from a survival model and build a probability-based mind. This is central to mental self-mastery.
Building the Probability-Based Mind for Trading
In Mindfulness, you are given the opportunity to grasp that the Self (that which you call “you”) is fluid and can be re-organized into a higher functioning Self. This will be essential for consistent success in trading. The old brain you inherited from history is simply not up to the task. It was built to control outcome, to be right, and to predict consequence. In trading, almost the exact opposite has to be designed. You have to let go of the illusion of control, the need to be right, and the certainty of prediction - no matter how well it has served you in the past.
Your primitive Emotional Brain has to be retrained. When encountering Uncertainty, it has to be trained so that the emotional programs of discipline, courage, self-soothing, and impartiality are summoned up to create the mind with which you engage Uncertainty. This is the organization of the potential Self that works for trading. It is not the natural order with which you are familiar. But it is the one that works with dealing with the probability and uncertainties of trading.
It requires training, no matter how much success you have experienced in the past. They (the non-trading mind and the trading mind) are simply different. Neither is better or worse. They both represent two different worlds that require different kinds of minds to be successful. It is so easy to stay stuck in the old mind because it is so familiar. And it has got you to this point in your life. But if you really want to create the conditions of success in trading, you will have to rebuild the mind for the environment of trading where Uncertainty is king. Your old mind has done a good job. It’s just that trading represents a whole new world that operates on a different set of rules. Fortunately, you have the capacity to rebuild the mind so that it is comfortable in the presence of Uncertainty and accepts not knowing as the new reality. This is the world to which the brain (with a little help) has to adapt.
The potential is there. And rarely does it happen by itself. In trading, you can no longer take a pass and expect things to get better. You have to become captain of your own destiny. And what you can control is not outcome, but the mind you bring to the moment of performance. This is a choice you make, day in and day out. Are you satisfied with the way you are currently creating your Future Self? Trading forces you to make a decision about who you are going to be when encountering uncertainty. Your trading account will tell you about the effectiveness of your present state of mind while trading. The door to change can be opened. Do you seize the day or do you let the moment pass?