Articles on Trader Psychology by Rande Howell, Trader Psychologist
“The order of thinking that got you into the problem is not the order of thinking that will get you out of the problem.”
A recent email from a trader
Lost, but Making Good Time
This trader’s motivation is admirable, but his blindness to understanding effectiveness in trading is killing him. What’s the biggest obstacle to your making money as a trader (assuming you know how to trade and can prove it in simulation)? Recently I did a survey during a webinar on Over-Trading. As you might expect, there was a crowd of more than 250 traders looking for actionable answers to their impulse problems. In that survey I outlined 9 different reasons that trader lose impulse control and fall into over-trading. All the different routes to over-trading were nearly equal – except one.
More than 60% of the large audience, literally 3 out of 5, of the traders, identified “A desire to make money now” as the source of their over-trading. Conversely, the fear of missing out, escape from boredom, the desire to chase trades, a need for excitement, a need to “do something”, and wanting to catch up – all of which are established causes of over-trading – were distant 2nds to the “desire to make money now”. A “desire to make money now” was way beyond any other cause of sabotaged trade and risk management.
But don’t all successful traders want to make money? Sure, they do. For that’s how they make their living. And they also enjoy the game of trading. But the successful trader’s focus, while in the act of trading, is not on the goal of “making money”. Their focus is on their performance. What they know is that if they control their performance (which they can do), the money will follow. It is about managing the mind they bring into the moment of execution. That is where their focus resides.
It seems counterintuitive, doesn’t it? Let’s take a closer look at this apparent discrepancy. It seems obvious that desiring to make money and actually making money should go hand in hand. After all, isn’t that the yard stick by which you are being measured? And if you don’t want to win as a goal, how do you go about winning the game? After all, you play to win because that’s the goal in trading.
The Bias to Win by Predicting or Controlling Outcome
It is very common for traders to focus on winning. To make money you have to win. And to win, the trader has to make things happen or to be right so that outcome can be predicted. The problem with this very common, and misguided, thinking is that outcome cannot be predicted or controlled in trading. This condition is very counter to successful people’s experience in other endeavors.
People drift into trading from sports, business, or corporate life where past success in career is rooted in being able to control outcome either by force of will, by manipulation of the political or business landscape, or by perfectionism. The Alpha wins by sheer force of will (being the leader that makes things happen), the Operator wins by a strategy of orchestrating outcomes (office politics), and the Perfectionist simply controls outcome by not being wrong.
Yet, when these unexamined assumptions that have driven success in the past are projected upon the markets, the effect is very different than expected. The very traits that worked to bring you success in the past now work against success in the brave new world of trading. Suddenly the Alpha, with all the positive self-talk he or she can muster, is blowing up trades rather than seizing opportunity. The Operator simply cannot use the same skills to manipulate outcome – the markets are well beyond political and business intrigue. And the Perfectionist can do everything right – and still be wrong.
The biological need for Self-Preservation by controlling and predicting outcome is so strong that the trader does not see that the world that he/she used to live in no longer exists. And in the new world of trading, the old rules do not apply. The new rule is that you cannot control outcome. In fact, the very assumption that you could was simply an illusion that you believed to be true. That illusion gets busted in the world of trading. And it is this reason that the vast majority of traders wash out of trading. They simply cannot shift the old paradigm of the illusion of control to the new trading paradigm of not being able to control outcome and embracing the uncertainty of probability.
What’s a trader to do? The more the evidence mounts up that controlling outcome no longer works, the harder the trader tries to prove that it does. The need and desperation to win to make money keeps the trader focused on attempting to control what, by evidence, he cannot control. This is the reactive loop that many traders find themselves sucked into. To them, the success formula that they have assumed to be true – and believe in their hearts – is not brought into question. And because it is so ubiquitous, they do not see that the assumption, ossified into unassailable belief, is not examined in the new light of their trading performance.
The Desire for Making Money Drives a Train Wreck
What happens when a trader focuses on making money? His attention is absorbed by something that he cannot control and takes him away from what he can control. As a trader grows, he lets go of trying to win. In letting go of his focus on winning money, he can redirect his attention to the one thing that he can control – the process of trading. By focusing on his process, he controls the mind that he brings into the moment of performance. He is no longer glued to watching his P&L statement bounce around, and with it, the emotional and mental state that he brings to the management of a trade.
Instead he is focused on process. What the trader knows is that any given trade exists as a probability of winning or losing money. He does not control the probability as certainty – he controls the mind that manages the trade. It is here that a true edge is created. Until the focus is on process, Methodology, Platform, and Psychology are not working as a unit. Managing process allows the trader to manage the mind that manages his Methodology and uses his Platform. This is where the edge appears – in the integration of all three.
Now the trader is not focused on winning or losing – only on performing in the zone. What he has discovered is that the money will take care of itself when the trader is in control of what he can control. Winning or losing only becomes a probability exercise. He has confidence he will get his share of the capital being put into play in the markets. This is the peak performance mind.
Winning and Peak Performance
What I want to emphasize here is that a desire for winning is necessary to becoming a successful trader. But that cannot be the focus WHILE IN THE ACT OF TRADING. Winning is a future event and is never certain in trading. So even if you do everything right according to your trading plan, it is no guarantee that you will win. It will only guarantee that you will have a GREATER probability of your trade falling on the winning side.
The goal of making money in trading (winning) gives the trader a direction to follow that guides how you invent he invents himself as a trader. Winning traders evolve from the certainty thinking of winning to the probability-based mindset of managing process from a peak performance state of mind. This is the zone that is so coveted in trading. You let go of thoughts of winning (and losing) and focus on managing the mind that performs in the moment.
When this is done, trades are evaluated from a performance framework rather than a winning/losing mindset. In probability, the trader knows he has no control over outcome, no matter how much he desires to have control. Yet, if you manage the mind that engages performance, the edge in probability is yours. You are no longer too excited about the thought of winning or too fearful of the thought of losing. The only thing that exists in that moment is your performance, which you can control. This is what delivers the edge in probability. This focus on probability is what frees you, the trader, from the tyranny of a mind caught trying to control what it simply cannot control.
If you control the mind you bring to performance, you no longer are working against the edge in probability that you do have. Now Methodology, Platform, and Psychology (the 3-legged stool of trading success) are working together so that your edge is working in your favor. This is the Peak Performance Mind that manages probability, rather than attempting to control outcome.