Articles on Trader Psychology by Rande Howell, Trader Psychologist
The first hurdle that a trader has to master is his/her desire or craving to make lots of money - against all odds. Seems counter-intuitive, doesn’t it? But why? Surely, the object in trading is to make money, right? You run the numbers, and you see what many others have seen – that with some good training, trading can catapult you to financial freedom. What a swoosh of excitement! And you realize that it is an achievable goal. All you have to do is apply yourself. You have your dream, your vision, and you will not be denied. That vision to become a successful trader is compelling. In fact, it takes you out of your good senses and you do not see that you are miscalculating what it takes to become successful in trading.
This is the exact mindset that leads to the enormous failure rate in trading that no one seems to want to talk about. Based on really rough numbers (because no one who calculates the success/failure rate has any motivation to do so), somewhere between 95%-98% of traders burn through their capital in three to five years and silently disappear from trading. But new, unsuspecting, people keep arriving and convince themselves that trading will set them free financially and that motivation keeps lining them up for training. Because the belief that everyone has swallowed, without examination, is that they can climb the mountain to success through training and willpower.
Nothing could be further from the truth. Much like walking into a casino, the odds are already against you, long-term. The longer you play, the greater the likelihood that you will transfer your capital over to the casino. Even if you do have a streak of winning, eventually the odds simply favor the casino. But who wants to listen to something that is so contrary to the myth of trading success? However, if you want to develop into a consistently profitable trader, you have to learn what others have resisted learning.
So, What Is the Problem with Desiring Success?
Nothing. Except don’t bring that desire for winning to the performance of trading. The desire to win actually gets in the way of actually becoming successful in trading. Sounds counter-intuitive, doesn’t it? A focus on success and winning are important in many walks of life. But trading is very different than any other career path. It is the desire for success (winning and not losing) that gets the trader in trouble – the same quality that is needed for success in many other endeavors. Trading is about probability (risk) management in a sea of randomness. And the brain that you brought to trading is not designed for probability management – it is built to control outcome. Or what can be called “winning”. And, therein lies the problem. Your biology, your flesh, is dead set against developing into the mind that you need for trading. It wants to win in the moment – not long-term.
And it is the desire to win (control outcome or be right) that gets in the way of the mind that engages the uncertainty. The survival instincts of your brain want certainty, but trading requires a probability mindset where probability is the final arbiter of success in the long term. You inherited a brain/mind (driven by the natural selection of evolution) that historically was focused on the dream of survival. The world was a pretty hostile place and humans NEEDED to believe they could prevail. That emotional learning got selected again and again so that it became a trait that was transmitted though the generations. And it proved enormously successful.
That trait (winning – controlling outcome, against all odds) worked until it encountered the world of trading. Your brain was not built for the probability (rather than certainty) that trading presented. Therein lies the problem. You bring a brain and a mind to trading that is incapable of success in trading. Not because something within you is flawed, but because you bring a brain to trading that is designed for one thing (short term success) and you are asking it to do something else (achieve long term success). And your brain is hardwired to desire victory against all odds. This is the depth of the problem. Your brain jumps into the fires of trading, thinking that it is forcing victory.
Waking Up from the Blindness of Chasing the Dream
So, traders come to trading driven by a desire to win, and win big. And they search for the Holy Grail of trading – knowledge or tools that will bring them fortune. But the survival instincts embedded into their historical heritage simply run into the brick wall of managing uncertainty, risk, and stress simultaneously. The more they push the “Rocky” mindset of winning against all odds, the more they hit the brick wall of trading reality.
Something has to give. This is the first wake up call for the aspiring trader who really seeks to learn how to trade. That wakeup call is about learning to observe and then change their evolutionary psychology about winning against all odds. The brain you brought to trading is hardwired to BELIEVE it is going to win despite the evidence to the contrary. Trading is not the first calling to allure people into impossible situations. The gold rushes in American history also exposed this deeply embedded drive to “get rich quick”.
Seeking fast fortune, people died seeking gold. For them, it was in the next claim. It was just getting lucky and finding the gold. It is the worship of wealth and fast accumulation of money that drove the fixation. In the end, the vast majority lost everything they had. But the dream of “making it” never died. It just found another venue. For many, that venue now is trading.
Most will never master this element of their evolutionary psychology. The inherent desire to win – and win big – is simply part of the flesh you bring to trading. The question is – what are you going to do about it? It’s not going to go away. And to be successful, you are going to have to master this intersection between your biological survival heritage and your trading psychology.
Fortunately, the Brain Can Be Reprogrammed
That need to win in the short term comes with the territory. It also produces a rush of dopamine and endorphins that make it seem quite possible that you are going to win big. And from a survival perspective, our species has. But when a person starts trading, he engages an environment that we have not been designed for by evolution. You have to re-design yourself.
First, you have to calm the excitatory process of your emotions engaging the unknown (what we call uncertainty and risk in trading). All that pre-loaded excitement of winning and dreaming about wealth has to be regulated. Otherwise you stay stuck in the same loop or pattern designed by your emotional brain for short term survival while ignoring the long-term survival needs of probability management. You keep chasing the dream and blowing up your account.
Next, you come to understand that success in trading, at its core, has never been about intellectual knowledge or tools that give you an edge – although they are necessary. Successful trading has always been about the mind that you bring into the moment of performance. It is not about making things happen. It is not about winning or losing. It is not about being right. It is not about proving yourself.
You never controlled these aspects of trading. You are engaging the randomness of the markets and have come to understand that you have no control over outcome. What you thought you controlled was, in fact, an illusion. No matter how much you desire to make money, to win, to not lose, and to be right, that desire will never translate into control. You really have no control, none. Except……
You can master the emotions that give rise to the mind that engages uncertainty, risk, and challenges. That is what you control. And without emotional discipline, you do not have the psychological edge you need to drive the method edge of your trading rules. Emotional discipline is not pushing emotions aside or not having emotions – it is about mastering the beliefs behind the emotions. It is these deeply held beliefs that give rise to the emotional response you have to uncertainty, risk, and challenges.
The mind you brought to trading, shaped by the pressures of evolution, simply are not up to the task – even the consuming desire to win big. The emotional discipline that you engage to train the brain and mind is what makes the difference. Instead of taking charge, the emotionally intelligent trader patiently waits to take what the markets will give.
This new mind is not natural to your cave man brain. But it can be taught. You master the mind that you bring to the management of uncertainty. Winning, losing, control, and being right are simply not driving forces in how you respond to the uncertainty and randomness of the markets. This is the power of NOW.