Articles on Trader Psychology by Rande Howell, Trader Psychologist
Your perceptual Blind Spot – you never know it’s there until you’re already in trouble. Everyone has experienced a rear-view mirror blind spot while driving. You look carefully into your mirror and its reflection of reality, seeing no danger in changing lanes, but don’t see the car that’s right beside you in your blind spot. Then you act, only to be alerted by honking horns and the squeal of brakes and tires. How did you miss something so obvious? It was right there, but you did not see it. The drivers that survive such encounters learn to anticipate the blind spots caused by the mirror. And though they do not see the blind spot in their vision – they know it’s there and compensate for it.
Yet in trading, where the management of risk and uncertainty are center stage to trading performance, traders are constantly whiplashed by the blind spot in their mind’s eye. Then afterwards, they ask, “What was I thinking?” A constriction in perception acts like tunnel vision and the trader does not see the danger that he or she steps into until it is too late. But unlike the driver learning from his or her mistakes, the trader rarely learns to see the blind spot in his perception. Believing they are rational beings and that they see “facts”, traders are convinced that they are seeing “thoughts as facts” in their rational mind and believe that they can hold their emotions at bay.
They live in a misguided assumption that they are rational beings acting from logic as they encounter uncertainty and risk under stressful conditions. This is the blind spot that compels their continued poor performance while under pressure, with real money on the line. The thinking mind’s perception is unquestioned so the trader stays stuck in the perceptual blind spot of believing his thinking mind is acting on facts, rather than being captured by streams of emotionally laden thoughts rooted in our survival instincts – not logic. Human beings, including traders, are not rational beings FIRST. They are emotional beings FIRST AND FOREMOST who have the capacity for logic when the challenges of stress are managed well.
The upstart Thinking Brain has done a great job of convincing us that it is the “You” that trades and that your emotional nature is secondary. Nothing could be further from the truth. Instead, all cognition (all that thinking your brain and mind does) is rooted into the emotional ground of your limbic (mammalian) brain. Thinking is directed by the emotional brain even if the thinking brain has you completely duped into believing that thinking is king and that you “see” the truth and facts. The Thinking Brain creates this blind spot in the trader’s perception because the emotional brain is fairly passive - until triggered by encounters with uncertainty and real risk under stress.
Before uncertainty, risk, and stress trigger the emotional brain to action during a challenging event, emotions seem silent and not part of executive decision making. Then, when triggered, the emotional brain is all in and simply cuts off the appearance of supremacy of the rational mind. Instead, survival instincts propel your decisions at these critical moments.
You, as a trader, know these survival instincts by their triggering in a variety of ways: revenge trading, over trading, getting out early, freezing on the trigger, and/or falling apart when a trade goes against you. Yet, at one moment you (as your Thinking Brain) thought you had it under control. You convinced yourself that you could force your emotions to obey the thinking brain and act logically. That is the evidence of just how blind you are to your primitive emotional nature.
Trust Your Trading Account Rather than the Fabrications of Your Thinking Brain
How do you start to recognize the blind spot in the perception of your trading mind? First, start noticing that the more tools you use to improve the accuracy of your predictions actually slow you down as you try to outsmart uncertainty. Notice those results in your trading account. Your trading account is going to bring forward the primitive limbic beliefs that drive the performance of your trading. It will bring into bold relief the very blind spot that you have not been able to see with your own eyes.
The assumption is that your eyes and your brain are seeing the objective reality “out there”. The problem is that there is no objective reality “out there” to see. There is a virtual representation of the world “out there” that your brain has created based on the assumptions, biases, beliefs, and limbic learning handed down from its learned history. It is this virtual representation that you (and the rest of the world) see as objective reality. You keep insisting that you are seeing the objective reality of “facts” rather than a symbolic representation of the world based on what your brain creates for short term survival.
It is this bias of the brain that creates the “blind spot”. Your brain is looking for THE TRUTH of objective reality. Trading makes sense to the Thinking Brain from this perspective. Unfortunately, this view of the world does not improve the health of your trading account. And you stay stuck in the blind spot that does not let you see beyond the limitations of the brain to get out of the box of the comfort zone your brain has created.
This is why the brain you brought to trading (based on the survival instincts of the emotional brain) is not going to be the brain that produces the mind capable of Probability Thinking. The Probability Brain is not blinded by the need to be right, the need to control outcome, or the need not to be wrong. This is all the survival instinct driven perception of the Survival Brain directing the Thinking Brain. The Probability Brain (once developed) is not seeking to win. It is seeking to perform consistently so that it has an edge in probability.
As long as the brain lives in the bias of winning, being right, and not losing as a short-term method of survival, you stay stuck in a world view that will not create the conditions of probability and success in trading. Just ask your trading account. Really study it.
The Thinking Brain will seek the comfort of the reassuring lie that there is a Holy Grail in trading. And it has you believing that as soon as you learn the secret, you are in the winner’s circle. It will keep waiting for you to turn the corner on your trading without really changing how your brain perceives the reality of the markets and your engagement in them. This is the blind spot.
This blind spot is partly biological, based on evolution shaping your perception by natural selection, and partly psychological. You bring a psychology of winning to the game of trading and insist that it will work in trading. The more bad news you get, the more tenacious the winning mindset belief becomes. Yet when you look at your trading account, another story is revealed. Your trading account is pointing to what you have been missing. But why can’t you see something that keeps whacking you in the head? It seems only logical that you would want to be aware of something that gives you so much trouble – the source of your fear of loss, revenge trading, over trading, and FOMO.
The Emotional Brain is Invisible to the Thinking Brain
People don’t see the Emotional Brain in operation because most of its function is subconscious – below conscious threshold – to your awareness. It does not think as you understand cognition. Instead, it reacts to circumstance based on what it has already learned. Thinking and cognitive awareness show up only much later in the work of the Emotional Brain.
When the Emotional Brain perceives opportunity or threat, it automatically reacts to the incident at hand. If it feels threatened, there is no thinking for you to notice. The Emotional Brain compels you to action. You would experience this in a number of different ways. If you have ever had a trade go against you and you lost your cool, you have experienced this emotional learning. Or if you have ever had trouble getting into a trade (even though the set-up is valid) because you are frozen – thank the Emotional Brain reacting to a perceived threat. Or you have ever revenge traded – traded from anger – you have also experienced the Emotional Brain in action. That also goes for over trading, where your Emotional Brain is perceiving opportunity with an urgency to act NOW. Rational thinking simply is not part of the equation.
All of these conditions are learned from experience by the Emotional Brain and happen before thinking can intercede with the emotional pattern. All this is happening in your blind spot, below your conscious threshold. It is happening automatically (as familiar pattern) long before your Thinking Brain has an opinion. But you do not notice the drama because it is below conscious threshold. And if you are going to become a consistently profitable trader, you are going to have to teach yourself how to see what you have not been seeing. Otherwise the reactive patterns of the Emotional Brain will continue to overwhelm rational performance when you are experiencing the stress of uncertainty and risk with real money on the line. And you never see it coming, because it is coming from your Emotional Brain rather than your Thinking Brain.
The Probability Brain – Designing the Mind that Trades
The adaptive pressures encountered by natural selection created the survival emotional response to uncertainty. This is the brain that you bring to trading. And as soon as you figure out that it is not going to work in solving the problem of working with probability (and are willing to do something about it – really), then you are in a position to start designing the mind that emerges from your Emotional and Thinking Brain so that they are prepared for dealing with uncertainty and risk under the conditions of pressure (where the money is real and the potential of loss is palpable).
It is here that you can begin to really notice how an emotion actually shows up in your body BEFORE hijacking the trading mind. Learning to calm the emotion before it explodes is the first job every trader needs to develop. But that is only the start. You have to become Mindful in a new powerful way. In Mindfulness, you can develop the skill of Observation. It is with this Observer that you learn to see the hidden beliefs that have been running underneath the radar of your awareness. Not only that but, through Observation, you can learn to mold the beliefs that the Emotional Brain acts from as it engages Uncertainty.
This is the psychological edge needed to drive your method edge when you feel the pressure of uncertainty and risk. The Emotional Brain relearns the subconscious beliefs that lie behind performance under pressure. If you are seeking trading success, this is essential. Thinking and logic alone will never solve the problem. Learning how to develop the Emotional Brain for performing under pressure will.
Next time your performances are ambushed by emotions, look directly into the blind spot and ask, “What emotion am I refusing to acknowledge, and what am I really willing to do about it?” This is how you begin to see the blind spot that has been robbing your potential. You can learn to “see” the emotional brain as it engages uncertainty and work with it to create the Probability Mind that unites your Emotional Brain and your Thinking Brain. This is the edge you seek.