Articles on Trader Psychology by Rande Howell, Trader Psychologist
A slightly frustrated and exasperated trader turns to his long time trading partner and says, “How do you do it? We have the same equipment, we trade the same methodology, I’m smarter than you and work harder than you – but you’re consistently profitable and I’m not. What do you have that I don’t?”
“Two things about control,” replied the profitable trader, “I don’t harbor an illusion of control like you do and I don’t try to control my emotions – I learn from them about what makes me tick. And then I use that knowledge to confront my personal trading demons and master them, rather than hiding from them. I have learned to control me rather than focusing on trying to control outcome. That is the difference between you and me.”
Emotions – the Stumbling Block that Won’t Go Away
You can taste the potential of trading in your mind. You know it is possible. You can feel it in your bones – and you want it and won’t let anything stand in your way. That’s the tantalizing part. It is so close, yet so far away. No matter how hard you try, no matter how long you search for the “secret” that will open the door to the next level, emotions still sabotage your trading mind at just the wrong moment. And if you’re highly motivated to succeed in trading, you try harder and look for the missing “fix” that will solve the problem of those pesky emotions creating such havoc when you put real capital at risk.
Why do emotions cause so many problems in trading? It starts with a lack of emotional intelligence – not understanding emotions. And from that lack of an effective understanding of your emotional nature, you do not know how to use emotions to create a stable mind for trading. Instead traders try to control what they do not understand. This emotional ignorance starts the avalanche of emotional hijackings so common in trading. The more the trader tries to control his or her emotions, the more seem to pop up at all the wrong times. But the reverse is also true – by understanding emotions, traders learn how to use emotions to create the mind that performs effectively under the conditions of uncertainty and capital risk. That’s emotional intelligence.
Emotions are not the enemy. They are simply part of the operating system of the human mind. In fact, this is where the mind is grounded. Thinking is emotional state dependent, meaning that the quality of your thinking is a product of the emotions that arise when you interact with the trading environment. If you grasp what is being said here, you realize that effectively managing emotions are front and center to your success in trading. The mind you trade with (for better or worse) is rooted in your emotions that arise when you are engaging the challenges of managing uncertainty. Whether you “like” emotions is irrelevant. Mastering emotions as a response to engaging uncertainty is simply essential. Until this is understood, there will always be a mental block to your capacity to trade effectively. If thinking is emotional state dependent (and it is), then becoming competent in working with emotions (to control the quality of thinking) is job #1 for the trader. No amount of knowledge, hard work, or success thinking is going to overcome the obstacle of emotional ignorance.
What Are Emotions?
People confuse the feeling of an emotion with the emotion itself. Feeling is really only the physical and chemical experience of the emotion in the body. And when you “feel” the emotion, your thinking has already been influenced by the power of the emotion – for better or for worse. The emotion itself is so much more. An emotion is a biological action potential that coordinates behavior (action) between the organism (that’s you, the trader) and the environment (that’s the markets that you’re interacting with). Emotions are the ground from which your mind springs and engages the market. This is why it is so important for traders to increase their emotional intelligence, so they can become masters of the emotions and mind that engage the uncertainty of trading.
Why is this important? Because under stress (meeting the challenges of life and trading), emotions only want short-term survival success (by escaping from threat, attacking the perceived danger, or taking advantage of the opportunity) and have no regard for long-term success. None -- zip. Unfortunately for you as a trader, your focus has to be on long term success as a function of probability. So here you have it – the brain and mind you brought to trading is built for ensuring the certainty of controlling outcome by survival in the short term, while the brain and mind you need for success in trading requires a long term focus on success for probability management. Every time you experience an emotional hijacking, you are replaying this challenge.
Trading is the exact opposite of what your brain and mind have evolved to accomplish. When put under stress (when challenged by potential loss), emotions are biased toward fight/flight because the brain interprets uncertainty as a potential threat to survival – particularly with capital at risk. This is the brain/mind you brought to trading. But it is not going to be the one that brings you success in trading. Emotions are only doing their job that they were designed to do. The moment that a loss of control over outcome (with capital at risk… life and limb to the emotional brain) is real, your survival instincts kick in, overwhelming your rational mind. Until this genetically encoded sequence is changed, your trader’s knowledge and skill is lost at the very time that it is needed most.
The Trading Mind on Survival Instinct vs. Probability
You cannot stop emotional responses to changes in status (i.e. pulling the trigger or order fill, etc.). Your emotions are just doing what they are designed to do – coordinating activity between you (the trader) and the markets. However, what can be changed is WHAT emotions arise to meet the challenge. Changing the emotions that give rise to the mind in the midst of uncertainty is the name of the game. You do not have freedom FROM emotion, but you do (with training) have freedom OF emotions. You can learn how to choose what emotions show up to create the mind from which you trade.
This is the psychological edge that so few traders learn how to achieve. Your brain (and your mind) becomes so locked into a very narrow definition of success that it cannot see the need to adapt to a new way of perceiving the world in which it lives. This narrowing of focus of attention becomes the mental block to your growth as a trader. You’re locked in (and don’t even know that you are locked in) to a self-limiting tunnel vision. You see only through the eyes of your survival instincts and emotional brain when exposed to the challenges of uncertainty and risk. Until you unlock this perceptual barrier, you are stuck with the default programming of your survival instinct. And you keep triggering the same reactive emotional patterns that prioritize short-term survival behaviors over the long-term probability mindset needed for success in trading.
Most traders take this problem personally – seeing it as a reflection of who they are as a human being. To neuro-biology – these are only response patterns. The brain, and its emotional responses to stress challenges, has to be re-trained rather than “out-willed”. This is a duel you (as a rational being) will never win. The more you resist and try to force your will, the stronger the emotional reaction will be. Remember - to your emotional brain it is a life or death situation, demanding short-term action. In such emotional urgency, the rational mind becomes slave to the emotional brain because it is hijacked by the overriding power of survival instincts. This is simply the default programming of your survival instincts triggering fear, anger, or conquest of the fight/flight response. Until this reactive pattern is observed, deconstructed, and redesigned for the management of probability; you will stay stuck in a mental and emotional survival stalemate that sinks your capacity to manage uncertainty with an effective mind for long-term profitability.
The good news is that there is a way through this conundrum.
Building a New Personal Narrative for Probability Management
There is nothing wrong with the mind you brought to trading (so don’t take it personally). It has done its job. You have survived into adulthood. The problem is that that brain/mind was built for another time, place, and circumstance. Now, for success in trading, a new mind with a different emotional configuration is needed when exposed to the challenges of uncertainty. The hot wiring between uncertainty, vulnerability, confusion, and the fight/flight response has to be decoupled and replaced with a new emotional response to the perceived dangers of uncertainty and capital risk that will result in a patient and disciplined mind.
This requires a completely different way of perceiving the world in which you engage. Fortunately your brain is primed for this adaptation also. The default programming in the formative period of your development created a personal narrative about your capacity to manage uncertainty successfully. That narrative is not “you”. Instead, it is only one organization of a potential self. Yet, to you it seems to be the “one and only you”. That is because you have become locked into a way of perceiving the world around you that predicts what will happen (controlling outcome). Is it true? Is it a fact? No. It is simply one point of view that takes on the feeling of truth. And it is so familiar, so ubiquitous, that “you” just accept it as the truth. That is the problem with feeling states – they feel true. And you are going to have to learn how to question what you have accepted as true.
This narrative then locks in and becomes the filter through which you see uncertainty. This is where traders become and stay stuck. They don’t know how to question or examine the biases that masquerade as facts and the truth. The brain just wants survival in the short term. This is the primitive narrative that you have inherited from history that controlled short term survival so well and is now being challenged by the need to better manage probability – rather than controlling short term outcome as it was designed to do.
Creating a New Mind for Probability Management
Once you truly realize that the mind that you brought to trading is not going to work to produce success in trading, how do you go about changing your perception (your personal narrative) for managing probability?
The first step to retraining the mind for effectively working with uncertainty starts with emotional regulation. Before you seek to change the emotional response that is your default programming, the first thing that has to be accomplished is to regulate the emotional triggering that is occurring. You learn to turn toward the emotion, acknowledge it – rather than denying it. With breath and relaxation training, you can learn to manage the arousal level of an emotion. This takes the fight/flight response off line. You will notice that you are no longer being hijacked by your emotional responses to uncertainty when capital is at risk.
The second thing you learn is to be mindful of your thought life, rather than mindless. The ground to mindfulness is the recognition that you and your thoughts are not the same. That, in fact, your thoughts are simply emotional programs of the brain being given “voice” in your mind. Waking up to mindfulness is about recognizing that the “self” is always in flux. It represents only one organization of a potential self, and it can be reorganized for higher functioning. Stepping back out of thought and beginning to examine it is a very powerful and freeing experience – because it sets you up as the designer of the self that engages uncertainty, rather than its hapless victim. You cannot control outcome, but you can control the mind that you bring into the moment of engaging uncertainty. This is personal power.
Once emotional regulation and mindfulness have been established as skills, you then learn to train the mind to bring particular emotional programs to the forefront to create the mind that engages uncertainty. Here you are no longer using the default programming you brought to trading. Now you are experiencing freedom of emotion. You can’t control the outcome of an event. But you do, with practice, learn how to create the emotional soup that thought arises from to engage uncertainty. This is the emotionally intelligent trader learning to take charge of their world. It is possible. It is do-able. The first step here is to recognize that the mental block was self-made. And it can be re-made. Yes, it is work. And it is worth it if you truly want to build the mind that can trade effectively.
The mind you bring to trading is adaptable. But it is you who have to wake up to its potential. If you are willing to learn how to work with your emotion, brain, and mind – you can evolve your mind from short-term survival instincts to long-term probability management. It’s your trading and your mind on trading. Are you ready to try harder to become more emotionally intelligent? The choice is yours.