Articles on Trader Psychology by Rande Howell, Trader Psychologist
Coming to Terms with the Reality of Trading
“After years of study, I know what to do. I just can’t do it. What I say I am going to do, I don’t do. I instead fall apart without even knowing it. It’s strange. Then, I tell myself it will be better next time. And suddenly, there I am AGAIN, doing exactly what I said I was not going to do. It doesn’t even seem like it’s me doing it. One minute I have emotional control – or at least I thought I did – and the next moment I’m in way over my head and have lost control. After the fact, I clearly see that I was not following my plan. But in the moment, it’s like I disappear and somebody else is trading. Only I don’t notice that my mind has been commandeered until after the fact. At first, I thought I was going to be able to “tough” it out and push through this little problem of mine, but it keeps happening. It’s like I step into an avalanche that I never saw coming.
A False Divide: Reason Never Existed Outside of Emotion
Just about everybody can identify with the lament of this trader. On the surface it’s perplexing. He, like many traders, knows his stuff. He’s worked hard for his knowledge and he is recognized by his peers. He knows what he should do. The problem is that he cannot do what he needs to do WHEN he needs to do it. Uncertainty and Risk are on a collision course at the intersection of knowledge and performance. The unsuspecting trader, convinced of the superiority of the rational mind when working with the chances of Probability, attempts to tamp down undesirable or unacknowledged emotions so that he can stay in control.
That is what he knows how to do – it is the common wisdom of trader group-think. In this way of think/perceiving, emotions are not really part of him. Instead, he stands in a core of Reason and Logic. Emotions are “out there” to be controlled (like any other piece of information) by his Reason and Logic. When rooted in Reason and Logic, the trader feels that he is in control and can predict outcome. In this trance of believing in rational problem solving, fear (in its many forms) feels very tame – like it can be controlled.
But in that tunnel vision, the trader does not see the emotion simply taking another route (a back door out of conscious oversight due to the fixation of the trader) in order to take control of the trading mind. Rational thinking got slammed by emotional ambush while the trader believed he was being logical and in control. Without his ever knowing it, the emotion subtly altered the way the trader could even think. The trader did not know to even look for an emotional contagion until after his performance was derailed. He walked into the ambush and never saw it coming BECAUSE HE DID NOT HAVE THE EYES TO SEE EMOTION AT WORK BEHIND THE SCENES. The trader is so entranced by the seduction of rational problem solving that he is blind to the overwhelming power that emotion has over reason. Sound similar to your trading performances?
How can this be? Actually, how could it not be? The trader in this vignette (like the vast majority of hard working traders) fooled himself into believing that emotions are to be controlled by force of will, or avoided in challenging situations (as if that were really possible). When using the trading account as a measure (rather than subjective beliefs, no matter how right they feel) this notion of the superiority of the Rational Mind and Logic does not hold water. When not being challenged by stress, it seems to the trader that logic can subdue emotion and that the level-headed dispassion of Logic is superior to the ups and downs of emotions taking over the mind.
Yet, this assumption is dead wrong. But, it does feel superior. It feels good to assume you and your rational mind are in control. But the dopamine fix of “feeling good” and “feeling certain” is just a learned adaptation that the brain locks onto because it takes you out of having to deal with the ambiguity of facing Uncertainty. The brain has come up with a short term fix to a problem that needs a long term perspective – something that the untrained emotional brain is incapable of doing. Meanwhile, the unsuspecting trader is in the gun sights of an emotional roller coaster without even knowing it. Reason has never been in control of thinking. Emotion has been in control all along. The Reason of the Left Brain is simply producing an explanation for what the Emotional Brain has already decided. Through the deceptive use of Logic, it only appears that Reason is in control of Emotion.
Rene Descartes was wrong. His famous quote “I think therefore I am”, though it gave us a measure of relief from being ruled by our emotional nature, was misguided. The assumption was that the Rational Mind was separate from the Emotional Mind. Not only separate, but the Rational Mind was superior to the chaos of the Emotional Mind. It literally put the cart before the horse. Though they can feel separate to the untrained observer, emotion and thinking are deeply linked. Not only does the corpus colosseum connect the right and left hemispheres of the brain biologically, the emotional and the thinking brain work together as a team to produce the quality and kind of mind that the trader brings to trading. Unfortunately, the vast majority of traders do not know how to integrate Emotion and Reason into a working team. And they certainly are not taught when they learn to trade.
In creating a false separation between Reason and Emotion where there is none, traders, in particular, set themselves up for trouble. By not understanding their emotions and how to work with them, the trader cannot build and maintain the mind capable of managing a world where there are no certainties – only probabilities. This is counter to how the brain and mind evolved, but it is the reality of the environment of trading.
Waking Up to the Impact of Emotional Nature and Trading Performance
You bring a Certainty-Based brain/mind to trading. That is what it has been engineered over eons of time to do. You, by design, seek to control outcome and to predict the future based on past experience. In addition, you also brought a brain/mind that linked Uncertainty and Fear together as a survival adaptation that was so successful in the survival of our species that this adaptation became hardwired into the human genome as a trait. Survival based emotions (i.e. fear, anger, lust, greed, and over-confidence) are triggered in the body, brain, and mind EVERYTIME Uncertainty is experienced. Remember, these are automatic emotional reactions that by-pass thinking. They are instinctive in nature and can easily operate outside the thinking circuits of the Left Brain.
This wonderful solution to human survival worked well until it ran into trading. All the Emotional Brain’s survival instincts, so successful in another time and place, then became a major obstacle to trading success BECAUSE THEY ARE ENCODED AS DEFAULT PROGRAMMING for immediate survival responses to perceived threats. Remember that Uncertainty and Fear became associated and then linked together in the Emotional Brain. To the survival logic of the Emotional Brain, keeping you from entering a trade is a victory for short-term survival. It is incapable of perceiving the possibility of long-term gain by entering a risky (even a little bit) situation. You survived by not entering the trade and avoided the risk of Uncertainty. This will warrant a squirt of dopamine to the reward centers of the brain, which reinforces the reactive solution for future use. Most traders never get past this conundrum in their quest to become successful traders.
Meanwhile the trader is left frustrated that he did not take a valid set up where risk-to-reward parameters were met and in his favor. Probability was on the trader’s side for success as a possibility. Taking action on the Probability of success would require a Probability Based brain/mind. To an untrained brain/mind that is not an option. Having a statistical edge over time and a large universe of trades is not what the Emotional Brain is hardwired to do. It is built to produce certainty of survival in the moment. Until this primitive emotional organization is changed, traders keep making the same mistakes over and over again.
Traders can talk the talk of a Probability Based Mind all they want. But talk will not create the transition from a Certainty Based Mind to a Probability Based Mind – no matter how hard the trader tries to talk him or herself into change. Emotions and mind simply do not work that way.
Stepping Out of Evolutionary Psychology into the Present Moment
The two problems that a trader has to deconstruct and re-organize to master the trading mind are the inherited Certainty Based survival mind and the adapted association between Uncertainty and Fear. Until these are re-formed into a mind that is Probability Based and where Uncertainty has been ontologically associated with Concern (rather than Fear) and Curiosity, the trader will continue to dwell in the old habits. Those old habits have served mankind’s survival well. Yet, these biases just do not work in the brave new world of Probability Management where the brain and mind have to embrace Uncertainty as the norm.
A new mind is needed. First the biological foundations have to be reconstructed – making Uncertainty normal and letting go of the illusion of control over outcome and accepting that you can control the mind that you bring to performance. Suddenly, the past is not predicting the future. It is into this new space of possibilities that the trading mind is born.
The first step is recognizing that the old paradigm of a Certainty and Control Based Mind does not work in trading. Usually it takes serious depletion of a trader’s capital to force the trader into seeking a new solution to his/her problematic trading. It does not have to be this way. The trader, so locked into his provincial mindset, simply has to be jarred into opening himself to new ways of understanding the nature of trading.
In this spirit, I invite you to ask these questions:
“Is my way of trading working effectively when capital is at risk?”
“Am I trying to control outcome or predict outcome (make money), or am I trying to control my performance of the trade?”
“What conditions have to exist for me to conclude that the problems I experience in trading are in my head rather than my platform or methodology?”
“Am I talking the talk instead of walking the walk of real change?”
I encourage you to really explore these questions and look hard at yourself and your ways. The trader who survives the tests of trading will courageously look into the mirror and see the changes that need to be made inside himself. Trading is not for the faint of heart. It is so much easier to fail in trading than to succeed. All you have to do is stay the same to fail. Succeeding requires change from the inside out. That is where that I ask you to look.