The Black Hole in a Trader’s Mind: Clinging to Certainty-Based Thinking in a World Governed by Uncertainty

Articles on Trader Psychology by Rande Howell, Trader Psychologist




Believing there is a Holy Grail of Trading is alluring.  It is Magical Thinking that results in sucking capital out of one trader’s account and placing it into another trader’s, who knows better.  The Trader doesn’t see the silent thief, only the aftermath.  Until the trader learns to see the world differently, he remains stuck in the cycle.

J. Rande Howell

There is a tragic flaw hidden within an unseasoned trader’s psyche that hijacks trading potential every time he or she encounters uncertainty with an untrained mind.  All the knowledge and know-how of trading suddenly disappears – and the trader becomes incapable of trading effectively, despite all his/her knowledge and training.  It’s a silent thief hidden in the shadows of an insular mind.  So well hidden in his ancestral past, he is oblivious even to its presence and would not know even to look for it.  Yet it lurks, beneath the surface of awareness, waiting to be triggered repeatedly when he experiences the unpredictability of uncertainty.  Traders experience this every time they are hijacked by fear, anger, or over-confidence.

 Until it triggers and takes over the trading mind, traders assume they have it together.  They can talk the talk when in the classroom.  Then suddenly arising out of nowhere, the demon of uncertainty raises its ugly head and the trader gets unraveled.  And the trader reacts instinctively – all that discipline and emotional control flies out the door.  It’s another bust that leaves the trader musing, “What just happened?  What was I thinking?”  This is the trap that traders fall into over and over again.  And they rarely figure it out.  

Meanwhile the capital drain continues.  And until the trader figures it out, he or she remains one of the herd who are blind to what he must master to become one of the 5% who actually makes consistent money trading.

Before Modern Man Thought They Were in Control

Before there was trading, before there was a modern world – there was a world where future traders were hunter-gatherers.  And you still carry this historical hunter-gatherer within you in your brain every time you trade.   In those ancient times, scarcity was real and self-preservation drove the engine of survival.  A loss was not a paper loss – loss was about survival.  Through the power of adaptation the hunter-gatherer’s mind was programmed to try and find order where there was only the probability of uncertainty.  The brain, and the mind, were trying to make sense out of a world even if the world would not cooperate.  Our ancestors learned to react without thinking to situations where there was a perceived threat.  The learning became traits passed on through the generations.

The modern world of trading is not so far away from this distant past of your ancestry.  In today’s trading world, every newbie, every novice, and every trader stuck in mediocrity is still looking for the Holy Grail of Trading.  They seek the Answer that will give them predictability and safety so that they can have certainty (special knowledge) in a world where everyone else is crippled by chaos…same as our hunter-gatherer ancestors.  Though there are no longer lions, tigers, and bears lurking in the shadows to threaten existence – the brain we bring to trading is still on the lookout for perceived threat.  And it finds a jungle of danger in the world of trading.

The strong urge to buy at a high point (on a trade which you convince yourself is predictable) - and invariably sell at a low point - is where predictability crashes into the unknowable wall of uncertainty.  Suddenly chaos reigns and a trader’s false confidence disappears into the mist – and fear hijacks reason, again.   The marketplace is the new threatening jungle.

After a few negative experiences in the market, where capital represents the trader’s lifeblood, the trader is even scared to pull the trigger because (in the mind of the hunter-gatherer) the likelihood of failure (and loss) consumes the trader’s mind.  Our programming that we bring from our history continually short circuits the very mind that we, as traders, need in order to manage uncertainty. 

There is a paradox here that must be addressed if the trader is to become successful.  The very mind that has been so successful in generating the certainty of our survival in our distant past is now the mind that cannot manage the brave new world of trading for success.  In our hunter-gatherer past, this certainty bias that was encoded into our species as a trait served us well.  Looking for, and avoiding or attacking, negative pattern was a desired outcome, so it was wired into the future trader at a genetic level.

This adaptive response to the environment even worked in many of the endeavors of modern life.  Aggressiveness in business and corporate life is rewarded.  Perfectionistic thinking is coveted since it results in not making mistakes and being “right”.  The old world of our ancestors just seems to slip into the modern world without missing a beat.  Until it misses a beat.

A Trait at Cross-Purposes

The same selective adaption is at work in the way we look for opportunity (or the way a modern trader looks for patterns that lead to set ups that predict positive outcomes).  The hunter-gatherer looked for patterns where a deer followed a particular path reliably, and he “knew” where to go hunting with a high degree of prediction.

This high degree of prediction of outcome that is so entwined with the evolution of the human species does not carry over to the uncertainty of the markets where a sure thing disappears in the unpredictability of probability and randomness.  This gap between the predictability of an outcome and the probability of an occurrence jars the well-honed trait (wired into us by our hunter-gatherer ancestors) into confusion.  And that is where the avalanche of uncertainty can wreck a mind adapted to predict certainty of occurrence.

In financial markets randomness and uncertainty are the norm, while in other areas of our lives order and predictability are the norm.  This is what happens when people who have produced considerable success in fields such as athletics, business, or corporate life (where certainty appears to be able to be made to happen) start trading and blow themselves up. 

Failure is not a likely option where predictability of outcome is the norm, particularly when hard effort can make things happen in a positive fashion or finding out what can go wrong and correcting for them leads to higher success outcomes.  Yet, when these traits are brought to the mind that engages uncertainty, they become unraveled.  Suddenly you are in a world (trading) where you can do everything right and have all the bases covered – and you can still be wrong.

This is what unglues many traders as they try to transfer skills that have produced success in other endeavors to the world of trading.  The same rules do not apply.  And the more the trader tries to push his old habits (rooted in the survival of the species) even harder to force the markets to behave according to the norms of his previous career, the more he traumatizes himself.

Now the pattern making brain of the hunter-gatherer boomerangs on him.  Because the brain is biased to look for prediction of outcome, the trader’s mind now predicts a failure outcome when experiencing moments of entry or a trade going against the predictions of the trader.  Now, randomness and probability of trading turn the world upside down for the hunter-gatherer part of our brain.  This is the gap that must be crossed for success in trading.  And only a few who start will finish this race.

Transforming the Trading Mind

Fortunately, the brain has neuro-plasticity as part of its heritage also.  That means that the mind that arises out of the activities of the brain can be transformed from seeking Certainty of Prediction to becoming comfortable with the Probability of Uncertainty.

The problem is that retraining a brain that started its migration out of Africa over 35,000 years ago and found trading only recently is not easy.  It takes work – not just knowledge.  All the reactiveness you see in your trading has to be interrupted, calmed, and then reworked.  It takes time and effort. 

Nobody reads a book and changes 6 to 7 million years of human evolution, no matter how smart they think they are.  Instead, it is more like how a brain is retrained after a stroke, where the brain has to be directed and trained to force the natural neuro-plasticity to rebuild.  In the trader’s case, a part of the brain was not destroyed, but the pattern-making machinery is so ancient that considerable effort is required to change the emotional reactions that are hard-wired in the brain when encountering uncertainty.  It has to be retaught to respond to uncertainty by approaching what the body interprets as dangerous.  Only then can a new mind be developed that embraces the management of uncertainty.

This process is explained in my book, Mindful Trading:  Mastering Your Emotions and the Inner Game.  But my courses go beyond mere knowledge.  They actually teach you the skills of how to retrain the brain and mind for engaging uncertainty.  Or as one trader recently remarked, “Rande, what you do is teach a person how to do brain surgery on themselves on the go”.

It all comes back to:  Do you really want to learn to trade successfully?  If you do you realize that the mind you bring to the act of trading is the Holy Grail.  The problem is that it is a diamond in the rough.  And it is your job to rebuild it.  As you embrace this new reality, you’ll discover something else – you never really had a choice.  You can continue to fool yourself, or you can learn how to work with the neuro-plasticity of your brain to create the mind needed to manage the probability of uncertainty.  Trader, heal thyself.
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