Articles on Trader Psychology by Rande Howell, Trader Psychologist

Deeply Held Emotional Beliefs Rule the Trading Mind

                You can declare that you believe something (i.e. I’m a disciplined trader), but it is your performances under stress that actually reveal the hidden beliefs that drive how you react to the Uncertainty found in trading (and determine your success as a trader).  And traders find there is a gap between what they say and what they do.  They try to convince themselves that they are a disciplined trader, but they fall apart when the money is real and they face ambiguity.  And affirmations and visualizations they’ve learned fall apart at the moment of truth.  But their trading account does not lie.  It reveals the beliefs that they project onto the markets.

                This is the gap between what they want to believe about themselves and what is revealed (about what they truly believe) by the health of their trading account.  The problem is that the trading account is not deceived by the ego’s need to look good (rather than actually being effective).  And the trader rarely ever sees this internal struggle going on right under his/her nose.  Hence, the lack of success in trading.

                Beliefs and emotions are deeply interconnected to the point that beliefs are actually part of an emotion.  And in trading, what you are actually experiencing are the deeply held, implicit, beliefs that you hold about your capacity to manage challenging moments where the outcome is uncertain.  These are the beliefs that are revealed by the health of your trading account.  And it may be that you actually don’t know what these beliefs are.  You keep running into them in your trading.  But you don’t recognize them as operating beliefs.  This is the gap that has to be closed.

                You just notice that you fall apart during critical moments in the trading process.  And that you keep messing up despite your best efforts.  So your surface beliefs (what you say about yourself when you are being a Monday morning armchair quarterback) do not align with your limbic beliefs (implicit beliefs) about your capacity to manage Uncertainty effectively.  (For instance, you don’t follow your plan when the money is real).  As an example, think of different situations where you have problems in the process of trading.  You may experience your operating beliefs as self-doubt and want more confirmation before entry – until the trade slips away.  Or, you may experience this as an urgency to enter trades and make things happen – and you trade impulsively.  Or you could take a loss (or several) and desire to get back to even.  It is these situations that reveal your hidden performance beliefs (limbic learnings) that drive your trading.

                You actually bring an emotionally centered (rather than thinking) brain to trading that evolved in a dangerous world where life and death were real concerns.  Uncertainty became coupled to fear and aggression for survival’s sake.  This is the way your brain learned to deal with Uncertainty.  Life was dangerous.  Losing meant death.  That is what drove the evolution of the brain/mind until modern times.  It was shaped by the conditions of a dangerous world where surviving in the moment was the guiding force for brain development.  Our Caveman ancestors evolved to control outcome, to win (live) and not lose (death), and to predict what was going to happen. 

                The Emotional Brain learned how to cope with these conditions by developing limbic learning.  These are not beliefs as we understand them today.  They were effective short-term solutions for survival that habituated and become neural patterns that could trigger automatically when stressors appeared in the environment (no thinking involved).  Emotions executed the reactive patterns when activated by encountering danger. 

                This is what instinct is – it is emotionally based, rather than thinking based.  It is these limbic learnings rooted in your capacity to manage the challenges of living that drive your thinking during stressful moments.  As the Thinking Brain evolved, those limbic learnings became beliefs because of our ancestors’ development of language.  What we learned as reactive instincts that automatically directed our performance actions suddenly had language to describe what was happening instinctively.  For instance, the intense need to prevail when confronted by Uncertainty (the appearance of a saber-toothed tiger at the cave entrance).  Winning meant driving the cat off (living).  And losing meant becoming the meal the cat was looking for (death).  Uncertainty was dangerous.   Winning was great.  And losing was horrible.  You bring this brain/mind to trading.  Your history primes you for performance problems (performing in the clutch).          

                How does this apply to trading?  The ancient brain could not distinguish Uncertainty from fear.  If we lost to the saber-toothed tiger, we lost our life.  Performance (losing) and the Self (Loser – loss of life) were the same.  So, the performance of winning and being a winner became tied together.  This is exactly the problem with an untrained brain/mind in trading.  You bring that ancient Caveman brain with you every time you face Uncertainty.  You are priming yourself to deal with a saber-toothed tiger when, in fact, there are no tigers in the trading environment.  But the ancient Emotional Brain is incapable of knowing that.  And it controls the quality of your perception.  You experience this as emotional hijackings.

                Uncertainty and fear got glued together a long time ago.  And to find success as a trader, you are going to have to separate them.  And then you are going to have to become the designer of the beliefs that you bring to the engagement of Uncertainty.  Left to its own course of action, the instinctive Emotional Brain will react automatically to the risk and uncertainty by triggering to fear or aggression as it evolved to do.  There is nothing wrong with this – it allowed us to become modern humans.  However, the short-term focus needed for ancient times has to be shaped into a brain that can remain stable in the midst of ambiguity. 

The Core Beliefs that Hold you Back

                Remember, what we are about to discuss are limbic learnings about your capacity to manage the Uncertainty of a moment.  As the Thinking Brain took root, those learnings became beliefs that are embedded in your emotional response to challenges in the environment of trading.  As we discuss them, keep in mind that the emotional reaction is the response you are having to your beliefs being projected onto the markets.  They are not conscious.  That is the problem.  And you are literally trading your beliefs.  These are the common ones:

Inadequacy – “I’m not smart enough.”  “I’m not good enough.”  If my Emotional Brain were facing a saber-toothed tiger, I can imagine that I would feel inadequate, quite naturally.  The tiger is gone, but the fear of Uncertainty (and your capacity to manage it) are not.
Proving I matter – “If I make a bunch of money by winning, I will prove that I matter (win).”  Money becomes a representation of power and the ability to win, and therefore, to be a winner (live).  Notice the unnatural link between winning (your performances) and your sense of being.  Many successful alphas have this underlying belief.  In the domain of business, this works.  In the domain of trading, it is disastrous. 
Undeserving – “If I don’t work hard, I do not deserve to make easy money.”  Call this the Puritan Work Ethic.  But it is a worldwide phenomenon.  Other people will sabotage themselves as they start winning because of this underlying and hidden belief about the Self.
Scarcity – “If I risk, what I have will be taken from me.”  This is the belief that keeps people in dead end jobs and situations.  If you have ever finally gotten into the black, and taken your profits early only to see your position hit its targets – you have experienced your personal scarcity beliefs.
Powerlessness – “No matter what I do, I can’t win consistently.”  The amateur trader wants to win (live) by controlling outcome.  The problem is that he cannot control the outcome (powerlessness in a particular domain) of the trade (no matter how much he is possessed to believe he can).  This is not where he does have control.  And most people stay stuck here (by the survival-oriented Caveman Brain) and never realize that they do have control over something that opens the door to successful trading – they control the mind they bring into the moment of performance.  This is the key. 

                Dealing with these self-limiting beliefs is inescapable.  Aspiring traders attempt to avoid them at their own peril.  They are part of our human condition.  And in trading, there is no way around them.  These beliefs have to be rebuilt so that a new mind, capable of dealing with Uncertainty, can be developed.

Evolution and Intention Part Ways

                Your job as an evolving trader is to redesign the way the brain/mind interacts with Uncertainty.  The old way (given to you by natural selection) is never going to work in the world of trading.  Your brain will never like being exposed to a lack of control over outcome, Uncertainty, ambiguity, and randomness.  This represents the worst nightmare you could make your instinctive Emotional Brain endure.  However, through the neuro-plasticity of your brain, you can become the designer of the way your brain interacts with Uncertainty.  You can decouple what nature has done, to a degree.  There will always be an emotional response to Uncertainty – that’s primitive programming.  However, you can become the designer of what emotions show up to create the mind in response to Uncertainty.

                First comes the regulation of the current emotional response to Uncertainty.  Then comes isolating the performance beliefs that drive the emotional reaction to encountering Uncertainty.  You have to face those beliefs and then master them.  It is not an easy process.  But it is an essential element in redesigning the mind for the challenges of trading.  Ultimately, the emotions of discipline (maintaining order under pressure) and impartiality (thinking clearly when challenged) are the essential emotions that need to be summoned to create the mind that engages Uncertainty.  The old brain’s response to Uncertainty will not work.  Check your trading account for confirmation.

                It is here that you control the one thing required to create success in trading – you control the mind that engages Uncertainty.  This is the psychological edge that drives your method edge.  Both are needed.  The real question is whether you are willing to challenge yourself and disrupt the familiar pattern that dominates the way you instinctively engage Uncertainty.  Willfully stepping out of your comfort zone is required to build a new way of engaging Uncertainty from a Probability (rather than a survival-based mind) Mind rather than a survival-based mindset.  Your trading performance hangs in the balance.