Articles on Trader Psychology by Rande Howell, Trader Psychologist
Why Are There So Few Successful Traders When They Have the Right Tools?
The rules governing trading success don’t seem to make much rational sense. In fact, they seem to defy the rules of universal success as most people understand them. Highly motivated people get into trading after concluding they can win at this game. They envision their success and are driven to make that success happen. But the belief that they can prevail is at the very core of their undoing. It doesn’t make sense – a proven winning attitude suddenly turns executioner?
If the desire to win and the willingness to work hard comprised the formula for success in trading, there would be far more winning traders than there are. But the road to success in trading is littered by the debris left by the alpha-thinking trader. Unfortunately, being highly motivated to make success happen and working hard to get ahead of the rest of the pack consistently turns into over-trading, impulsive trading, and revenge trading. Then after taking hard losses based on hard work and a can-do attitude, the alpha-trader often becomes gun-shy – fearing more losses. Now the trader is stuck between the desire to take action to achieve his/her goal and the fear that those actions will result in more losses.
How does trading move the trader from such lofty expectations to being stuck in a quagmire?
Wanting to Believe Meets the Industry’s Sugar Coating
Just study the literature of the trading industry for a little while (especially from traders who have already “drunk the Kool Aid”) and it is easy to see the upside potential. With skills mastery, it appears the possibilities are as endless as they are intoxicating. Just scale up a successful trading system and financial and time freedom call out your name. With a little dedicated effort and skills development, it’s almost like a trader can learn to print money. It’s easy to imagine. And certainly the industry accentuates the positive.
And you learn that there are all sorts of safeguards to help you protect your money. And after all, how much worse could you do than the professionals who lost a chunk of your investments in the recent past? Somewhere along the line, it started to seem plausible for you to do this, based on the grand scheme of things.
This is when most traders begin to drink the Kool-Aid and BELIEVE without examining the underbelly of risking capital in the markets – their logic seems to go missing in action. This is where traders, while acknowledging the high failure rate of traders just like them, come to believe that the facts do not apply to them – this is called Cognitive Dissonance. For most traders the desire to get out of the rat race of corporate life or business is a strong motivator to see trading as a possibility for their lives. Plus, there is all that money to be made! And after a lifetime in business (not having to manage employees or deal with clients or the competition) trading looks like a welcome relief. Traders want to believe the enchanting story of success promoted by the trading industry. This is an example of the blind leading the blind.
From those friendly guys who promote trading as a new career, the major thing that they tell you that you need to do is just to learn how to trade. And casting about, you discover that there are any number of ways to learn to trade. And somewhere along the line you actually have a close relationship with an instructor who knows what he (or she) is doing. You believe that you can beat the odds. You knew it was going to take you some time to learn how to trade. But you were ready to learn. And you were not going to go “live” until you had demonstrated that you could make money in simulation. And once you had that under control, you were ready for live trading.
It was a good plan – if it had been based on the reality of trading, risking capital, and uncertainty. There is a major glitch in the way traders are taught to trade. The body and brain do not cooperate with the myth of rational thinking – particularly when capital is at risk. The desire to believe (on the part of the aspiring traders) and the lack of understanding of what is required to successfully trade come face-to-face when the trader starts trading live. Logic is poised to rule, while the mammalian/emotional brain has been relegated to a back room in the trading mind. Then capital is put at risk. And all bets are off.
The Invisible Glitch that Keeps Crashing the Party
The brain was not built to trade successfully. In fact, it evolved to do the exact opposite of what is required for successful trading. Your emotional brain’s mandate is self-preservation in the short term – keeping you alive reactively in the moment. To carry out this mission, it simply hijacks thinking if thinking gets in its mandate of carrying out this most basic of survival functions. To do this, it must control outcome in the short term. This has a much higher priority than to risk negative consequences (death) in the short term for a bigger payoff in the long term. The short term motivation of survival and the long term motivation of landing on the right side of probability more often than not are alien notions to the survival instincts of the emotional brain.
Therein lies the dilemma for the trader who knows how to trade but cannot make him- or herself stay disciplined within a plan that gives the trader an edge in the long term. The emotional brain does not “see” long term. It sees only threat to survival in the short term. And when put to the test, the emotional brain wins every time. It simply hijacks the musings of the thinking brain as if it were dust in the wind – while the trader still deceptively “believes” in the superiority of rational thought. And because the trader insists that he or she can think and act outside of the survival-oriented emotional brain (he actually believes that reason and logic exist outside of emotion), he keeps falling for the same programming glitch until he comes to his senses or runs out of capital.
In truth, the logical thinking brain simply makes up reasons (explanations) for the decisions that the emotional brain has already made – including the unexamined reasoning that led them to start trading in the first place. Remember, you had to want to “believe” in the possibility that trading held for you for you in order to suspend the evidence of such low success rates. You had to believe that there was something inherently different about you to believe that you could defy the odds of success. Whether we like it or not, our brain is set up for self-deception. Rarely do we examine the facts before we are forced to by the reality of the situation. Even then, the bias of the brain is to project responsibility outside of the self so that the self is preserved in the short term (remember the self-preservation bias is inherent and is in operation at all times).
Developing a Mind that Manages Risk and Uncertainty for Long Term Success
Now that you understand why success in trading is so difficult to achieve, how do you go about working with a brain that is dead set against your long term success in trading?
First you come to a new understanding of the brain, “you”, emotion, and the mind. One of the hardest concepts to grasp is that you and your thoughts are not the same. It seems so elementary that “you” are having these thoughts that run around in your head (i.e. “of course, these are my thoughts, how could they be anything else?”) What seems so simple to see is also wrong. You do not have thoughts – they are having you.
What you call your thoughts are actually emotional programs running in the brain that are electrical in nature. These programs are both enormously competitive and cooperative with one another as they forge an organization of the self that is adapted to survival in an environment. In the animated film from Pixar and Disney titled Inside Out, you will see a simplified version of these emotional programs competing with another to produce a self that thinks. (If you have not seen the movie, you should. It shows how a mind is created from basic human emotive programs.)
Once both logic and reason have been put into their more humbled place, the engine of emotion still has to be managed. The second step, as taught in my process, is emotional regulation. Until you can manage emotion so that it does not easily hijack the capacity of the brain to think in terms of probability, there is no capacity to change the way you think under pressure.
The third step is to develop your capacity for observation. You will need to learn how to step back out of thought to see what emotional program is actually generating the kind of thinking you are projecting upon the markets. It is in recognizing that you are seeing through the eyes of a virtual representation of the markets (and not the market itself) that mindfulness allows you to finally see. A particular virtual representation is only good if it allows you to grow your trading account – for it is a representation of the beliefs you hold about your capacity to manage uncertainty. That is what your trading account is actually measuring. It will not lie to you. It will tell you the truth, if you are willing to listen and learn from it.
The fourth step is applied mindfulness. This is where you become the designer of the emotional programs that give rise to mind, perception, and thought. There are certain emotional programs that are efficient in managing probability in the long term rather than being “right” in the short term. Developing these programs in the face of survival demands is not an easy task – hence, there are few people who start along the path of trading who actually survive and prosper without using applied mindfulness.
Disciplined impartiality is not evolution’s answer to self-preservation in the short term. But it is the combination of emotional programs that can manage success as probability in the long term. The most basic and primitive of emotional programs – fear, and its cousin anger – have to be quelled for this emotional complex to be nurtured into the operating self that allows perception under pressure.
This is the long road to victory and the brain is biased against its development because of its short term perspective. The brain would much rather take the short fork in the road. That’s its nature. The problem is, the brain is so driven by short term survival success that you cannot trade successfully. But for those who master the mind that they bring to manage the uncertainty, the rewards are there. It is the retraining of the brain from its natural survival instinct in the short term to the long term benefit of a mind that serves intention – this is the holy grail of trading.
It takes the trader out of the comfort zone – the illusion of control over outcome. What becomes possible, though, is managing the mind that you bring into the moment of performance. It is here, outside of all the hype of winning and predicting the future, that trading victory is found. The past is gone, the future hasn’t arrived – all that can be controlled is the mind that engages the uncertainty of trading, and of life.