Articles on Trader Psychology by Rande Howell, Trader Psychologist
“Ready I am for the Storm” is an old Scottish ballad about a fisherman who is a long, long way from shore in his boat when a serious storm at sea comes his way. It was supposed to have been a clear day, but now a dangerous squall is bearing down on him in his tiny boat. There is no way to outrun it. One way or the other, face it he must. There are no other options.
He has been here before. It is part of the unpredictable circumstances in the life of a fisherman at sea. So, he battens everything down in his boat, anticipating the coming storm. And he prepares himself mentally and emotionally for the storm’s challenges to his life. He knows these are dire circumstances. Reaching deep within himself, he steels himself and turns toward the storm and declares with all his might, “Ready I AM for the storm”.
Being a trader is much like the fisherman in this ballad. Traders fish in the waters of the markets – just trying to make a living and feed their families. They have the skills and tools to navigate the markets. They know how to find opportunity in the markets and, in theory, have the means to bring their catch home. All they have to do is stay their course and follow their trading rules and they will be rewarded with their fair share of the catch. The problem is that markets, just like the sea the fisherman plies his trade in, are unpredictable. Just like the fisherman was not expecting a dangerous storm on a clear day, traders (as part of their craft of risking capital) have to face the storms of uncertainty found in the markets.
The difference between the fisherman in this ballad and the vast majority of traders is that he was prepared to face the challenges of uncertainty (with his life on the line). He could not control the outcome, but he could master himself in the midst of the storm. Traders rarely do. They do not understand how the brain reacts to uncertainty. They do not see the approaching emotional storms as they risk capital to an uncertain future. It is this lack of understanding of emotions and thinking under stress that keeps blinding them to the very tools they need to deal effectively with the market environment in which they exist. Trying to ignore emotions or “muscle” them simply makes the whiplash worse. If you have ever frozen and could not pull the trigger on a valid setup or gone nuts when a trade bounced around and went against you, you have demonstrated that lack of emotional competency so necessary for maintaining discipline in the midst of challenging moments.
What is an Emotion?
Let’s start at the beginning with this unexamined notion of emotions. Emotions are not feelings, though feeling (the subjective experience of an emotion in your bloodstream as chemistry) is an aspect of an emotion. Emotions are not psychological, though they take over a person’s psychology when aroused. Emotions are not optional. You cannot turn them on and off at your command. Emotions are triggered when there are changes in the environment (that’s the market) in which the organism (that’s you the trader) operates. Winning, losing, entry points, a trade going against you, and a trade taking off in the right direction are all examples of changes in the environment that, by definition, trigger an emotion to appear. Whether you notice the emotion activating or not is the question. That depends on your emotional intelligence and the level of your mindfulness.
The mindless advice that keeps popping up in trader education that you are to “leave your emotions at the door when trading” is dangerous because it creates the illusion that you as a trader should be able to turn your emotional nature on and off by simply flipping a switch and muscling your emotions into submission. That is like walking in a mine field without a map showing you where the mines are. Sooner or later you learn that’s not a good idea. An emotion is actually best seen as a biological action potential whose job is to coordinate action (behaviors) between the environment (markets) and the organism (that would be you, the trader or active investor). It is potential that activates when there are changes in the environment in which the trader is embedded. The more stress the trader experiences, the stronger the activation of the emotion.
Many traders can talk the talk (you know, talk shop) when things appear predictable and when the money does not count (sim) because the level of stress is not high when there is not a threat to capital. Risking capital to an uncertain future sets off an alarm in the autonomic nervous system (ANS). This is the stressor that activates the fight/flight response of the sympathetic nervous system (SNS). This is trouble for the trader because the emotional programs associated with the SNS are fear, anxiety, and anger. These emotional programs hijack the capacity to think and deliberate so that you act from instinct (reactive).
Suddenly, the information is simply not sent to the thinking brain but, instead, re-routed to the amygdala and then to the fight/flight response of the SNS. This is the generator of the emotional storms of trading. Adding the stress of risking capital to an uncertain future puts you in emotional storm alley. And, if you are a typical human being, you have been taught not to see the potential of the emotional storm as it activates or approaches you. It’s not psychology that gets the trader in trouble. It is his or her emotional biology, lurking in the background. It is all happening beneath the radar of your working awareness. And this is what gets traders into trouble. You never see it coming because the stressor changes the rules of operation. You (the thinking brain) are left out of the loop.
First You Create the Habit, Then the Habit Creates You
A habit is embedded into neural circuitry as a patterned response to environmental cues that maintains the status quo of the organism (trader). Unfortunately for the trader, the bias of habit formation (reactivity) is rooted in the need to control outcome, to be right, and to predict consequences. This is your Caveman brain. It is a certainty-based model build for survival in a dangerous world. Your inner Caveman is built to survive in the short-term. That was all that mattered back then. And it was very successful. Humans thrived with all these hardwired conditioned responses to potential threats. This is the foundation of the brain (and mind) that you bring to trading.
Unfortunately for modern man in the form of a trader, the brain you brought to trading (Caveman Brain) is not going to be the brain that brings success in trading. The brain and mind needed for trading require a probability-based mind that is built for long-term success (having an edge in the markets). You could not have built a worse nightmare in which to expose your primitive emotional brain (Caveman Brain)! Through evolution your brain brings to the game a bunch of preprogrammed instinctive emotional programs that operate outside of conscious awareness. And under the challenges of stress found in trading, they react automatically for short-term survival. Your long-term edge is not even on the table under the conditions of stress. This is why and how all those emotional storms keep snatching defeat from the jaws of victory in your trading. Your emotional Caveman Brain sees threat and instinctively triggers to hardwired survival habits as an automatic response to stress.
This is the source of all the emotional storms you experience in trading. After being bitten a few times, your Caveman brain believes that it is in the middle of a storm, or that a storm is approaching, or that a storm is just leaving. The calm between storms is only a lull between storms – that’s what your Caveman Brain has learned. And at the very bottom, triggering all this instinctive reactivity, are the beliefs you bring to the management of Uncertainty. These are implicit limbic beliefs you hold about your capacity to manage the potential of Uncertainty… not the ones you say you hold, but the ones that you actually do hold, on an instinctive level. They will be revealed in the long-term health of your trading account.
You Do Not Have Beliefs – They Have You
It’s easy to act like a tough guy when there is no threat apparent. In trading that threat is about risking capital with an uncertain outcome. This is a threat that you cannot control by force of will or by having a high regard for yourself. It is here that the limbic learning of your Caveman Brain governs the beliefs that drive your performance. And the Thinking Brain makes up stories (a narrative) to support what your emotional Caveman Brain has already decided. At this level the brain only believes what the eye shows it. And the eye only shows the brain what the brain wants to see. It is these beliefs that have to be brought into the light of your growing awareness and really examined. Again, not the beliefs that you say you have – but the ones that are revealed in your performances and measured in your trading account. Without that truth meter, called your trading account, your brain will continue to lie to you.
Just listen to the inner commentary going on inside your head. Just watch yourself trade. See the emotions run across your face. Look at the tension in your body. This is where you can find the emotional storms before they get dangerous and hijack your mind. And remember this, Fortune favors the courageous. It is here the real game of trading is played. Finding out (and fixing) who you are (how you perform) under stress is the key to mastering the emotional storms of trading. It may not be comfortable in the short-term. But it is here where eventual victory is found in the long-term. The choice is yours. Trading is a demanding endeavor. It is the most powerful self-development venue that you will ever find. Your weaknesses and your fears will be revealed. This is the moment where the door to self-mastery opens. And you become ready for the storms of life.