Stopping the Pattern of Giving It All Back (and More)

Articles on Trader Psychology by Rande Howell, Trader Psychologist




“I was doing so good.  My mind was in the zone.  It felt like a state of flow.  I made $1200 in the morning and stopped for the day, just like my trading rules dictate.  Couldn’t have been happier.  Wow, this was really working!  The very next morning I’m in a good mood and ready for the day.  Then I turned around and gave it all back – and then some.  It’s baffling.  I thought I had my head together, but before I knew it – I got stuck into a vortex that sucked capital right out of my wallet.  Why does this keep happening?”

Does this ever happen to you?  It is a common problem.  Most students of trading seeking consistent profitably experience this particular breakdown on a regular basis. You get some momentum going and can begin to see your trading gel.  Your confidence begins to grow, showing that you can, indeed, make consistent money trading.  Then it just blows up right in your face.  Not only do you lose the gain you made – you lose more.  Often a whole lot more.  One minute you have a growing confidence that you can do this trading thing.  The next minute, that confidence burns down and frustration grows from the ashes.

What Causes You to Give It All Back?

It’s not like you set out to blow yourself up.  But, effectively, that is what keeps happening.  So, what is behind the self-sabotage?  Let’s start with an understanding that the problem is not just psychological.  There is also a contributing biological component.  In fact, what you will discover is that biology and psychology conspire against you, aiding and abetting one another.  We will be looking at two different forms of “giving it all back” to help you understand the problem better.

Euphoria Based Mindset  

Let’s face it – winning makes you feel good.  And you want to win – to make money.  When the trader in the vignette above “wins” $1200 on a single trade, it makes him feel good.  Winning (making money on a trade) triggers a dopamine rush that is at the center of the reward chemistry of the human brain.  And this is a problem.  His particular understanding of the psychology of winning and the biology of reward creates an emotional state called euphoria – otherwise known as feeling good.  It is this “feeling good” after a win that leads to confidence in his ability as a trader to extract capital from the market.  The euphoria of “feeling good” is an emotional state that causes thinking to become skewed into believing that the good times are going to roll on forever and that he (the trader) has the power to control outcome.  He feels vindicated and in control.  However, winning (in this trader’s understanding) produces this sense of power that is dangerous to the management of uncertainty.

The emotion of euphoria that appeared when the trader won also warped the kind of thinking and analysis that he was capable of producing as a trader.  The winning led not to power, but to euphoria, which led to over-confidence (in hindsight after the loss).  The over-confidence then caused the trader to believe he was making the winning happen.  Then the next day, he woke up ready to go and do the same thing - (win) again – just like he had proven he could.  Notice here that the emotion has him believing with certainty that he can make winning happen.  This is a dangerous implicit assumption from which to trade.  But why?  Don’t you want to feel good about your trading?

No, you do not.  It’s dangerous when developing an edge in your trading.  In this case, on a limbic level, the trader now believes he is the “edge” in his trading.  That’s your caveman brain in action.  Unfortunately, the caveman brain (your emotional instinctual brain) is not going to bring you the kind of mind that is needed for success in trading.  The trader in the vignette does not understand this distinction about the impact of emotions on the critical thinking needed for success (not winning) in trading.

The next day the trader wakes up and ramps up his winning attitude.  He is ready and excited (there’s that euphoria hiding out in his brain and mind) to get started on another winning day – as if he had any control over whether he won or lost any given trade.  He feels good and is ready to go.  He also has a compromised psychology for trading.  And in his excitement and confidence, he jumps into trades that are not in his plan for the day – but he is confident they will work.  He is confident because of the unrestrained emotional chemistry pulsing through his body and brain – and not because of his trading competence as measured by his trading account.  The quality of mind that managed his trading the day before is not there today.  But he does not notice that.  The “feeling good” of confidence seems so great and it seems natural that he would want to feel this way.  Maybe.  However, this “feeling good” is not advisable while he is managing the mind that is engaged in trading, uncertainty, and risk.  Instead it sets him up for self-sabotage.

The emotions that give rise to an effective trading mind are discipline, courage, self-soothing, and impartiality.  Feeling good has no part in a mind that trades well.  First the trader has to accept that “feeling good” is not desirable as a trading emotion.  And second he/she has to be able to notice if and when “feeling good” has started contaminating his/her trading mind.  This is easier said than done.  But this is simply part of growing the emotional skills to trade effectively.

Several years ago, I was presenting a workshop in China to a large capital management group that included traders, portfolio managers, and fund managers.  During a discussion about how dangerous “feeling good” or euphoria is to the trading mind, a number of people got up and left the auditorium.  They truly disagreed with my assertion concerning “feeling good”.  China, at this time, had experienced a two decades long bull market, where throwing darts would have produced more winners than losers.  So their arrogance was understandable.  Interestingly, the very next day their stock market experienced a 2% market correction.  They were no longer “feeling good”.  A few came to me and said that they now understood why “feeling good” was dangerous to the investing mind while positions were open.  They would have acted differently if they had been interpreting from a mind rooted in emotions other than euphoria.

This is one of the largest hurdles for traders to overcome in trading.  We want to win (make money).  We want to be in control of winning and making money.  But when you take the winning mind to trading, it loses.  You cannot make winning happen.  The evolved trader recognizes that winning simply means that you landed on the right side of probability.  That’s all.  There is no reason to get excited.  It’s just probability and you have an edge that gives you an advantage in the randomness of probability.  And when you lose, you have only landed on the wrong side of probability relative to your concerns.  That’s all.  It’s just probability.  It is not about you.  It is about probability.  Consistent profitability is simply showing you that your system is working.  It is not about your capacity to be right and win.

Many traders believe that if they could get past their fear of loss, they would not have problems in trading.  But once they their master fear of loss so that it is no longer impacting the mind that trades, they have to learn how to deal with winning and the over-confidence that can easily develop when a trader starts winning.  You have to learn how to deal with the euphoria associated with winning.  It’s just the evolution of the trader adapting to the demands of successful trading.

Lust and Greed-Based Mindset

Most impulsive trading is primarily rooted in the emotion of Lust, rather than Greed.  And after winning and feeling the money go into your account, many traders experience the awakening of Lust – wanting more, more, more.  They experience winning and the making of money – and they want more.  Greed is about wanting more that your reasonable share.  So there is a balance between Lust’s “wanting more, more, more” and Greed’s wanting more than your reasonable share that plays into the phenomena of “giving it all back and more”.

What few people realize is that Lust is a primitive and primary emotion, just like fear.  It is not the desire for wealth that is the problem – it is the lust or worship of wealth or money that leads to trouble.  Lust is at the core of impulsive trading.  For traders, the major problem with winning is that it ignites the lust for money.  And because it is such a powerful emotion, it can easily overwhelm the discipline, patience, and impartiality needed for effective trade management.  Let me give you an example of Lust taking over a trader’s mind and setting him up for self-sabotage.  Actually, the vignette that started this article is a quote from a trader who experienced Lust hijacking his trading mind after a series of profitable trades.  It was so subtle that the trader never noticed it. It was only after a reconstruction of the event where he gave it all back and more that we were able to piece together what happened to his trading mind after a series of profitable trades.

Jason grew up dirt poor.  And hungry.  A meal consisted of a banana cut into several pieces as meals for the children – and the mother ate the banana peel.  Life was struggle.  The family saw in pictures and advertisements how the West lived – but for them there was only abject poverty.  Living in a third world country where poverty was rampant, his siblings and he walked to school barefoot because his family could not afford shoes for their children.  And it was hot.  Their route to school was defined by a grouping of trees that cast shadows on the ground.  If they could not walk in the shadows of the trees, their feet would burn from the heat of the sun.  And when they immigrated to the United States, their mother worked as a nanny where, from her perspective, she saw how the rich lived in a land of plenty.  And she experienced both shame and guilt that she could not give her children what her clients had.

Her son, my client, grew up working hard to get out of poverty.  Working hard to have money.   And his view of money was driven by his history of poverty.  In the States he worked hard, often holding several jobs at the same time to build up his capital as a way out of poverty.  He learned English, educated himself, got a good job, and pulled himself out of poverty and into the middle class.  Then he found trading.  In trading, he found the vehicle to accumulate wealth.  And in his mind, all he had to do was work hard.  That would be easy for him. 

The problem was that every time he started making money, he would crash and burn his account down.  It was the same thing.  He would make money.  Then he would give it back…and then some.  Some traders blow themselves up because they do not believe they deserve to make the “easy” money of trading.  While others fall into the euphoria trap when they win.  This was not the case with Jason.  He wanted money.  In fact, he lusted after money.  And this was a problem that came out of his history of poverty and scarcity.  Every time he started making money, he wanted more, more, more.  A good profit was not enough. 

The limbic learning, set from childhood poverty, created a lust that would chase money in the hopes of striking it rich and living the good life.  The lust (this is not greed; it is much more primitive than that) drove him to desire even more money.  Once he saw a trade move past breakeven and become a reasonable gain, the lust for more, more, more would crank up.  The target would not be enough.  Instead he wanted more.  His lust after the dream of money originated from another time and place.  Until he learned how to master this implicit belief, he blew up a number of accounts.

At first, he did not understand what was happening to him.  It happened so fast.  It was also happening on a limbic level rather than on a conscious level.  Until he put these pieces together, he could not understand how or why he self-sabotaged by giving it all back, and more.  Now he saw it plain as day.  It happened after the trade became profitable but before it hit his target.  He still had enough emotional control to exit the trade at his target.  But, by then, he was primed.  His Lust (his desire to want more, more, more) was activated and coursed through his brain and mind.  It was this limbic learning, gained through his history of poverty, that had to be re-built.

It’s the Beliefs You Don’t See that Blow You Up

Both traders examined in this investigation had no idea what was at the root of their self-sabotage.  This is the nature of learned implicit beliefs that operate on the limbic (or subconscious) level.   It is the health of the trading account that demonstrates that there is a limbic learning at the base of your trading performances.  Yet it is not mysterious.  It is simply part of the way the limbic brain (or the emotional brain) operates.  It adapts us for survival in the moment.  When a solution for short term survival is found that is successful, the limbic brain will lock that learning into place and it becomes an unexamined belief operating beneath the radar of your awareness.  It is these beliefs that have to be found and rebuilt for long term probability management.  It is not natural for the brain to operate this way, but it can become the new normal.  Remember that Lust for achieving more is also what drove Jason to become successful in his new home in the States.  It was adaptive at one time, but in another environment (trading), that Lust became dangerous.

Finding and rebuilding these beliefs for probability management is what is required.  The potential of a successful trading mind is in the balance.  But primitive evolutionary adaptations of your biology will have to be examined and changed.  Moving from short term survival instincts to long term probability management is simply what has to occur if you plan on developing a mind that can bring success to your trading.  You can be the designer of the mind you bring to the engagement of uncertainty and risk, rather than its hostage.  This is the psychological edge you need to exploit the method edge you have developed.  This is where you have to look at the health of your trading account.  It will help reveal the limbic beliefs that drive your performance when money is on the line.  Let your trading account speak to you, and reveal the truth.

Back to blog