Articles on Trader Psychology by Rande Howell, Trader Psychologist
Imagine having your perception (and your reactions) change in the blink of an eye. Suddenly what made no sense moments before now makes perfect sense. What you were sure was true a moment ago became a limitation to your understanding. And now, instead of being locked into that frame of reference that constricted your world of action potential, a completely new way of understanding opened up worlds you never knew were there – and it had been sitting right in front of your face all along. Think about how that could impact your performance in trading. What do you actually think you are “seeing” when you interpret the markets? Hold on to that thought for a moment.
Recently I was reading an article about a middle aged medical doctor who volunteered to have a special magnet moved over her scalp to impact processes in the brain below her skull. Before the experiment she was asked to write about an event in her life from her present frame of reference (before the magnets). Her memory of the experience was that she had attempted to help some colleagues who were having trouble solving a particular problem. And from her frame of reference she believed that she could help them solve the problem because she was a good problem solver and could help them get out of their fix. When she approached the people to help them with suggestions that would solve the problem, they became angry with her and pushed her away.
Her explanation (from her point of reference) was that ordinary people just don’t appreciate smart problem-solving people. She believed that they could not see the problem as clearly as she did and that they were not interested in learning – and from her frame of reference this conclusion was true. She had lived with that explanation of the event for a number of decades – that her smartness set her apart from others and that others did not want to learn how to solve problems.
But the application of the magnets changed all that. As the magnetic field interacted with certain areas of her brain, she suddenly saw the situation very differently. Her sleeping emotional nature had been turned on like a switch, and she could now see that the people she tried to help were building relationships as they worked through the problem. They were, in fact, solving the problem quite well from their frame of reference. There were two frames of reference that separated her from the people she attempted to help. Both were blind to the other’s frame of reference. And like strangers in the night, they passed each other blinded by their separate frames of reference.
This doctor, having been diagnosed with Asperger’s Syndrome (high functioning autism), did not have the frame of reference to “see” the emotions at play with the other people. Instead, she only saw the situation through the eyes of logic, while the other people were seeing the situation through the eyes of fun and sharing together. This is what she explained when she wrote about the situation after the magnetic exposure. She had been blind to what she could not see, even if it was right there in front of her. For her, the others might as well have been from a different galaxy.
Suddenly, after the application of the magnets, she saw the world differently. A new frame of reference showed up out of nowhere and changed everything. The doctor recognized that she had been blind to the impact of emotions on how we interpret reality. She had been living in a parallel world to the other people, although she thought she was in the same world. Her eyes were opened to the bias that had limited her perception and what she saw as possible. For an hour while the effect of the magnetic intervention lingered, she could see from a very different frame of reference. In doing that, the world she lived in changed. Unfortunately, the effect was only temporary. Then, she reverted to world of high functioning autism again.
But she now saw what she had been blind to for so many years. She could only see and interpret from her historical frame of reference, but now she knew that there was a blind spot caused by her very frame of reference. She was no longer blind to what she was blind to. What she was now aware of though, is that there are other frames of reference that create different realities all around her. And she needs to be cognizant of them.
What Frame of Reference Are You Trading From?
Now, go back to that thought you were holding. When you engage the markets, what do you think you are actually “seeing”? On the surface trading looks logical – the same mistake the good doctor made in the account above. Just like her, traders assume and are constantly told to “leave their emotions at the door” and (I love this one the most) – “trade what you see, not what you feel”. It sounds like sage advice until you realize that it lands you in a maze of different parallel worlds co-existing with one another, separated only by each observer’s frame of reference. The trader’s frame of reference locks the observer into a ubiquitous tunnel vision that blinds him from interpreting data and market phenomena from other frames of reference.
You “see” from this biased frame of reference without questioning the assumptions or biases that form the frame of reference that causes you to see what you see. And most traders stay blind to this phenomena, though it is right there in front of them. Just like the Asperger’s doctor only being able to see out of the eyes of logic and seeing problems to be solved while the others were relationship building from their frame of reference. And, yes, they were facing a problem – but they saw it as an opportunity to build and strengthen relationship and have fun in the process. They did not see it as a problem to be solved, as the doctor did in her attempts to be helpful.
What Are You Actually Seeing?
When you are interpreting market information, there is an assumption that you are “seeing” real things, real information, and black and white facts. But what if you are not? What if you were really “seeing” an interpretation of phenomena based on your current emotional state and beliefs? In neuro-biology you learn that your brain takes sensorial information from your senses that collect data from the world beyond your body and creates a virtual representation (not the truth) of the perceived world BASED ON ITS BELIEFS. In effect, your beliefs about your capacity to manage the challenges presented by an uncertain world color your perception of what is happening right in front of your face.
The key point here is regarding your beliefs and the vulnerability caused by uncertainty. Beliefs are not true; they are only assumptions that have taken on the power of truth. You are not seeing reality in your charts. Instead you are seeing data that is massaged by the beliefs you bring to the event. What you see causes you to see what you see. Most traders trade “not to lose” rather than to manage the mind that is engaging uncertainty. Other traders are looking to take action so that they can make money or win (that is the object of trading, right?), rather than focusing the mind to stay in the moment of performance.
Both these positions (trading not to lose and trading to win) focus the mind on the future. They are trying to control the future outcome. Unfortunately, in trading, that cannot be accomplished. Trading will prove time and again that you do not have control over outcome. Yet, from the frame of reference of most traders, they stay stuck in this way of interpreting both the data being observed and the emotion that is creating the observing mind. In the case of the trader trading “not to lose” – he is already perceiving from emotions of fear – and has lost even before he begins. Through a fear-based mind, he is attempting to avert the disaster he sees on the horizon. That frame of reference locks him into a perceptual map of his trading world that limits the probability of success.
The trader with the “winning attitude” is attempting to control outcome by sheer willpower. The belief in winning is strongly instilled in many traders because it has produced success in his professional life BEFORE trading. But in trading, again and again, he discovers that no matter how much willpower he brings to the act of trading, he still cannot control outcome. The winning attitude actually becomes a danger to his trading performance. In an effort to make things happen, the trader chases trades and revenge trades after he loses. He believes (and then thinks) that he has control over outcome by exerting a positive mind and by taking action – only to discover that his sense of control is an illusion.
Both “trading not to lose” and “trading to win” create a frame of reference that limits the possibility of achieving success in trading. Neither aggression nor fear produce a mind that engages uncertainty successfully. This requires a frame of reference focused on what the trader can honestly control – him or herself. This is particularly true of the mind that is brought into the moment of performance. The challenges of managing uncertainty will always be present. And no matter how hard you try, the trader has never had control over outcome in the game of trading or in life in general. However, he or she does have control over the mind that is brought to engage uncertainty.
The Probability-Based Mind
Once the trader realizes that external control has never been a workable option (no matter what the temptation to believe otherwise), trading “not to lose” and “trading to win” can be deconstructed as a frame of reference. And a new frame of reference can be built upon the wreckage. That new frame of reference is built upon controlling the mind that engages uncertainty – where both winning and losing are simply probabilities. The emotional attitude that grounds this new frame of reference is different. It is built upon the foundation of discipline defined as maintaining order while under pressure. It is built upon courage defined as turning toward your discomfort and learning from your fear. It is built upon self-compassion defined as calming the flames of fear and shame so that those emotions do not hijack the mind that engages uncertainty. And it is rooted in impartiality defined as the capacity to think clearly in the face of uncertainty.
When these emotional programs are working together, they produce an emotional cocktail perfect for managing uncertainty - where you let go of outcome and focus on managing the mind that you bring to the moment of performance. This is a skill that can be learned and taught. What it takes is curiosity and a desire to learn from mistakes, rather than continuing to repeat them. Just as the doctor learned to see what she had not been able to see, you can learn to see beyond your current frame of reference that keeps you from achieving your trading potential. Please explore this website to learn more.