Articles on Trader Psychology by Rande Howell, Trader Psychologist
Scared Money: Knowing Better, But Still Chasing Losers
"Know Thyself" Socrates
It doesn’t make any sense. You know better. Yet that trade goes against you (and maybe you’ve lost a couple already) and a twinge of discomfort surfaces. It’s like your “spidey-senses” begin to tingle. Then urgency sneaks up behind you and throws your discipline out the door. Then you believe it will turn around if you just give it some room. (This is called emotional reasoning.)
Somehow, this line of reasoning makes sense right now in the heat of the moment – you “believe” it is going to turn around (whatever that means). You “feel” certain of it (this is emotional chemistry – not the truth). You keep throwing scared money at it as the loss grows from acceptable to painful. Now it’s a bigger loss but you can’t let it lose – too much money is on the line now to let it lose. You’re ready to fight to save the trade. (You feel like you have to.) More money, now scared, is sucked into the vortex.
You know the end of this story. It’s not pretty. The trader can have a real good win rate, but a couple of out-of-control losses eat up the P&L statement. You just don’t know what gets into you when you abandon reason and chase a loser that crashes your day, week, or month. But as a trader, it will not be a stranger to you. At the moment of feeling your “spidey-senses”, you transitioned from a manager of risk to a gambler. Yet if you are like everyone else, you never saw the hijacking coming. And you could not get out of it once it had sucked you down the rabbit hole. What really happens when you (a knowledgeable and rational trader) get emotionally and mentally overrun and start chasing your losers?
The Need to Grow Your Emotional Intelligence
Emotional ignorance will cost you in trading. In the vignette above (which comes, by the way, from a client I’m currently working with), I made the assertion that the trader was hijacked when he felt his “spidey-senses” (a reference to comic book hero Spiderman). It was that twinge of discomfort leading to the “feel” of his “spidey-senses” that primed the trader for the emotional hijacking. He simply pushed that tiny discomfort away, not recognizing that it was the tip of the iceberg. If he had caught it then, he could have calmed the brewing emotional storm down before it made landfall. Instead, he pushed it away in his traditional pattern of dealing with negative emotions. Meanwhile, the mindlessness of this approach to emotions gave the emotional storm energy and so it built up outside of his working awareness.
Socrates made the statement “Know thyself” nearly 2500 years ago. The need to truly know thyself is just as true today as it was in his day. And “knowing yourself” is rooted in Emotional Intelligence – understanding what makes you tick. In the vignette above, the trader is doing everything he can to push the fear that keeps bubbling up into his working awareness back into the shadows of his mind. He’s pretty good at it too. In regular life you would never guess that fear nibbles at his confidence. It is so easy just to push it away and put off dealing with it. But in the drama of trading where time is so compressed (compared to regular life), emotional responses are forced into action. And willpower has no chance of keeping the boiling water from overflowing. Willpower simply wears down with more and more effort and eventually the dam breaks – just like in the case of the trader above.
At the very core of the problem, the trader above is like many retail traders. He has a fear of failure and a greater fear about what that failure means to him as a human being. Sure, he has a fear of losing that presents a real performance problem where successful traders have to become expert losers. They know in the management of randomness, there will be many losses simply because their trading system only gives them a slight advantage. There will be many losses that simply have to be kept small. It’s just the nature of the beast of trading. But getting past that is something that few traders achieve. They hate losing – and in trading, unfortunately, it is critical that you learn to lose well. So, your entire understanding of winning and losing has to go through a dramatic change that few are willing to accommodate on a basic level. But that is not what is driving this trader’s performances. (The reason I know this is because he is my client.)
His problem is that he fears failure – and what that failure means to him. It’s not about losing a single trade. It is about his failure as a trader. He is a trader who has a finite amount of capital that he sees dwindling – getting smaller and smaller as the weeks and months roll by. There is a time limit – and it is ticking – on his life as a trader. His aspiring career is on the line with each loss he takes. He knows the real estate is going to run out at some point. And he feels that scenario calling out to him. If he fails, it is not just the trade he loses. It is also his career. And facing up to the shame of being labeled a “loser”. This is an extremely common problem found in retail trading.
Out of that dilemma, he does not want to take a loss. It just represents one more nail in a coffin. That is also something that he does not want to face. But pushing it away is no longer working. It is staring him in the face. He can either re-up his willpower and denial, or he can master the particular fear of both failure and of being labeled a loser. Eventually, all traders have to master this most basic aspect of their emotional nature. Ignoring it is not going to work. What does work?
Winning vs. Performing
Once you accept that you are not a rational being, who occasionally has to deal with the messiness of emotions; but are, in fact, an emotional being who rationalizes – the world can open up for you. And first on the list of changes is the way you hold both winning and losing in your belief system. Most traders initially start their trading day with the idea of making some money today. The affirmation of “I’m going to make some money today” is (to me) one of the most dangerous declarations that a trader could make. Seems counter-intuitive, doesn’t it? Yet, do you really have any control of whether you actually are going to make money or not in trading?
Your system may give you an edge in probability, but, in truth, you really don’t have control of whether or not you are going to win any given trade or any given day. You are attempting to control something that you do not have control over. What happens when you try to control the uncontrollable? You deplete your strength and will. And you begin to act from the fear-based instinct of your Caveman Brain. Then your emotional brain is going to try to stop you from entering trades. You keep looking for more confirmation as a way of avoiding the conflict between the truth (I cannot control outcome) and the deception (I’m going to make money today). Then, in a panic, the mindset slides to “I’m not going to let myself lose”.
What you can control is the mind that you bring to the performance of a trade. You can perform well, come win or loss. And with your system edge, your performance (over time) will extract more capital from the markets than you give back. In the case we’ve been exploring in this article, the trader was trying to control what he could not control (not losing). The moment he left the conditions of his trading plan and gave the losing trade some more room in the hopes of it turning around – he became a gambler. He was no longer managing risk. He, instead, was trying to force winning to happen out of desperation. He discovered that he did not control that. And he left what he could control (the emotional base from which the mind arises) by the wayside.
Self-Mastery Is the Name of the Game
This trader has to deal with the real fear behind his performance failures. That continued failure produces a destiny that is governed by the fear of losing his capital and career. And his status. This is where the journey of self mastery calls out his name. Does he answer the call? Better yet, how do you answer the call? Very few traders make it to consistent profitability. Very few. Why? Because they are not equipped to deal with the psychology of trading. Trading will force the hand of the trader. It’s always been that way. The mind that you bring to trading is simply not going to produce success in trading. You can thank Evolutionary Psychology for that. My hope is that you really do begin to examine what failure means to you. It’s not a bummer. It is the light at the end of the tunnel. And you will become a better, more effective, human being because you looked into the mirror and saw the real roadblock to your growth and realized that you can remake the brain that trades. It is your responsibility to enhance your response-ability. Though it was not originally built for the management of the Uncertainty found in trading, it can be built.