Re-Train the Brain for Success in Trading

Articles on Trader Psychology by Rande Howell, Trader Psychologist



“Rande, I don’t know what’s wrong with me.  Technically I know how to trade.  I know what to do.  In simulation, I can practically print money.  The problem is that I do not do what I’m supposed to do when the money is real.  I have rules, but at crunch time – I don’t follow my rules.  Instead, “something” possesses me and I do stupid stuff.  Only I don’t know I’m doing it until the smoke clears.  What had been a promising day turns into a red day.  I give back everything and more.  What’s wrong with me?”

A Quantum Leap:  Moving from Instinct Driven Behavior Based on the Illusion of Control to a Probability Based World

            I get communications like this a number of times each week.  A trader thinks that his or her problems are unique, but this is a common problem that all evolving traders have to face and master - the Brain on Uncertainty.  The answer to the trader’s question, “What’s wrong with me?” is that nothing is wrong with the trader.  He is normal.  His brain is reacting to Uncertainty fueled by risk as it evolved for millions of years.  It’s just doing its job as it was built to do. 

            The problem is that he is asking his brain to do something that it is diametrically opposed to doing – being comfortable while acting in the face of Uncertainty with tangible risk on the table.  In the vignette above, the “something” that has possessed the trader’s mind under stressful conditions (and has caused him to throw out his rules that give him an edge) is the instinctive nature of the ancient emotional or limbic brain.  It is the brain that we share with our distant pre-historic ancestors BEFORE the modern Thinking Brain developed.  It is also the brain that we share with other social mammalians.  So, we share a very similar Emotional Brain with other members of the animal kingdom, but humans also evolved this gigantic Thinking Brain that forever separated us from the rest of the pack.  Out of this, humans get quite arrogant and come to believe that Thinking is separate from Emotion.  This is a short-sighted flaw in perception because the Emotional Brain has enormous power over the Thinking Brain.  That very power causes the trader in the vignette to throw out his trading rules when he engages Uncertainty with real risk on the line.

            Our brain was not engineered as a new product, where all the flaws are eliminated, when we humans separated and became a distinct species.  Instead, it evolved one work-around after another.  The old stuff still hung around and the new system was built over the old.  That is what you bring to trading.  Much like when one bank acquires another but does not build a completely new computer system (that would be ideal in a perfect world).  Rather, it does a workaround.  Awkwardly the two banking systems integrate two independent systems into one.  There are flaws in this approach – but starting from scratch is simply not an option.  You get something that is functional but not perfect. 

            It is the same way with your brain when exposed to the randomness of Uncertainty.  As a trader, you are attempting to produce a workaround from your current knowledge and skill to the knowledge and skills needed for success in trading.  Unfortunately, there are some thorny flaws in the assumptions you bring subconsciously to trading about success, winning, losing, being right, and predicting outcomes that are so familiar that it would not occur to you to question them.  They are invisible to you.  And they don’t work in the arena of trading.  This is your Emotional Brain operating below conscious threshold on instinctual and automatic programming with no input from the Thinking Brain.  The Thinking Brain never sees this part of your brain responding to uncertainty.  This is what is referred to as your subconscious.

The Flaw in the Workaround Between the Emotional Brain and the Thinking Brain

Your highly vaulted Thinking Brain started out as a growth out of the Emotional Brain.  We could call it a tumor.  It was highly valued for survival in a very dangerous world in which our ancestors lived.  This new-fangled aspect of our brain gave us humans a great advantage in the survival game.  So natural selection favored it.  It grew and grew.  And as it grew, the Emotional Brain’s neural circuitry grew into the new brain also.  It produced a powerful communications network that went from the Emotional Brain.  So the Emotional Brain could “talk” (it is what neurons do) to the Thinking Brain and have profound influence over it. 

            But most of that communication is one-way.  From emotion to thinking.  This is why all thinking is emotional-state-dependent.  Thinking serves Emotion.  This is the workaround that traders have to solve in order to adapt from a certainty-based, emotionally reactive brain/mind to a probability-based disciplined and patient brain/mind in the heat of the moment.  It’s a tall order.  While the Emotional Brain has extensive high-speed communication lines going into the Thinking Brain, the Thinking Brain has the equivalent of two puny 19th century telegraph lines going back into the Emotional Brain.  This is a serious glitch in the workaround strategy that the brain used to develop the Thinking Brain.  The Thinking Brain has very little say-so in decision making while experiencing stress.  This is bad news for the trader and the mind he brings into the moment of performance while trading.

            It is also why the reactive instinct of the Emotional Brain overwhelms the deliberate probability management of the Thinking Brain – the very thing you want for an effective trading mind.  For you to become a successful trader, you are going to have to re-work that communication glitch between the Emotional Brain and the Thinking Brain.  It’s not going to go away – it is there to stay.  Willpower won’t handle the problem.  Willpower is easily subverted under the dual pressure of reactive emotional programs hijacking thinking and the pressure of Uncertainty.  Go back to the vignette at the beginning of this article.  The trader is performing from this glitch.  He just doesn’t know any better.  Nor does he know what to do about it.  He doesn’t even know (at this moment) what the problem is.  My intent in the first part of this article is to shed light on the problem.  If you don’t know what the problem is, it is really hard to solve the problem.  None of the problems you experience in trading are your exclusive problems.  But it is your responsibility to solve this evolutionary glitch between your Emotional Brain and your Thinking Brain.

         The good news is that you can re-train the brain.

Calming the Emotional Brain’s Reactive Nature is Job One

            Your brain was designed to control outcome, be right, and predict causal relationships (predict the bottom).  For our Caveman ancestors these were important traits that were bred into the species because they were successful for survival.  These three traits were built into our evolutionary psychology as instinct.  And when you do not control outcome, or are found to be wrong, or miss predictions, automatically emotions are activated.  The emotional triggering is not optional.  It is instinctual – beyond conscious control.

            Every time you cannot control outcome, are not right, and your predictions are not right, the ancient fight/flight response is triggered by your Emotional Brain.  And because it has the capacity to overwhelm the Thinking Brain, the Emotional Brain’s response to loss of control leads to instinctual primitive responses to threat.  Either by triggering fear in all its forms in trading or as aggression exhibited as over-trading, revenge trading, or trying to make up for losses.  The hardwired response is already there waiting to be triggered. It is primed and on a short fuse. The Thinking Brain never had a chance.  It is already hijacked before it gets the message, long before it can hope to be deliberate about rational options. 

            Think about the implications of this.  If you hold an expectation of making money today, being right about a move, of being able to predict what the market is about to do – you are asking your brain to do something that it cannot control.  And what happens if you keep subjecting yourself to control something that clearly you cannot control?  Answer: your limbic or Emotional Brain is learning that it is a failure at controlling your engagements with Uncertainty.  And it becomes over-reactive.  Out of the newly formed belief, an instinctive emotional response to Uncertainty is set up that is beyond the Thinking Brain’s capacity to manage – and you freak out and start doing stupid things (like our friend in the vignette learned to do on a limbic level).  The thinking Brain never knew about the coup.  The Emotional Brain is way too fast for it.

            This is where you must learn how to breathe differently when you are facing stressful situations – when you don’t know what will happen.  Breathing is actually part of an emotion.  In fight/flight responses to stressors, breathing is either shallow and fast or you hold your breath.  This is the breathing style that you need in place to activate the fight/flight response (and subsequent loss of disciplined trading). 

            However, if you were to train yourself to begin breathing diaphragmatically (which is the breathing signature of a calm, relaxed, and patient mind) as you enter a stressful situation, the instinctive response to threat (fight/flight) would not be able to gain enough strength to hijack the Thinking Brain.  You would then be able to control the intensity of the emotion so that it would not take over the trading mind. 

            Try this the next time you trade.  Use a mirror to watch yourself as you trade.  You will see the associated muscle tension in your face and body that aligns itself with the emotional breathing patterns of fight/flight.  You can learn to regain emotional control.  And I teach this as part of my training.  As always, understand this.  Managing the intensity of the emotion so that it does not take control of the rational mind does not solve the problems you have to solve to become a successful trader.  But if you do not control this aspect of your emotional nature, you will never get to the door of the mind – where you will find the self-limiting beliefs that drive your performances under stress and that are reflected in the health of your trading account.  This requires another skill.   

            But first regulate the emotion so that it does not hijack thinking and re-train your brain for success in trading.  Successful trading is a journey of self-discovery.  This is the first step.

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