Understanding Fear and Learning to Master It

Articles on Trader Psychology by Rande Howell, Trader Psychologist




Despite a commanding knowledge of trading, the vast majority of traders experience fear every day on a level that compromises their capacity to trade effectively.  They can almost touch the promise of trading, but they cannot capture their financial dreams.  This problem eventually comes to a boiling point somewhere in the evolution of a trader.  At this turning point they either leave trading, continue to suffer losses, or begin to take a closer look at themselves. They recognize that the Holy Grail is not “out there” in their system or methodology.  The trouble lies within them – their Inner Trader, the part of them dealing with fear.  The solution also lies within them. 

So much energy is then focused on pushing through their fears in trading (rightfully so) that another question is never raised.  Is fear the enemy – or is it a symptom of something going on below the threshold of awareness?  It dawns on the evolving trader that the battle has never “been out there” in the markets.  When you learn how to disrupt the “little fear”, do you suddenly become a consistently winning trader?  The answer is, rarely.  Mastering fear is the start of a journey toward the inner trader.  As jarring as this realization may be to a trader battling his fears, this is only the first, and foundational, step into the transformation of the self required to become a successful trader. 

Learning to deal effectively with fear opens the door to re-training the brain and mind for peak performance trading.  Ultimately, a trader perceives and acts based on his deepest beliefs about the self’s ability to handle the uncertainties of life and the markets.  This is where potential lies.  Fear blocks development of potential beyond the trader’s self limiting, survival based, beliefs about the self.  But what are the tools and skills a trader needs to harness in order to develop his potential as a trader?

Mindfulness:  Developing Awareness of Your Potential 

Until the spell of fear is broken, getting to the potential that lives within remains locked behind a closed door for you.  Even when the trader learns to regulate fear so that it does not sweep him away and he can establish a calm mind, how does he locate the discipline, patience, courage, and impartiality that he must develop?  The answer to this question is crucial in order to move from mediocrity to successful trading - the answer is that he develops awareness through the skill of mindfulness. 

For all the talk about mindfulness, people remain vague about what qualities constitute mindfulness.  Simply put, mindfulness is the capacity to be aware of (observe) your thoughts, your biases, and your beliefs – not as who you are, but as what your sense of identity has become fused to.  Further, in mindfulness you become witness to your thoughts, beliefs, and biases.  And a startling discovery is made:  you and your thoughts, biases, and beliefs are not the same.  They are simply one possible organization of the self. 

You were born into a history of thoughts, biases, and beliefs that your brain, through adaptation, embedded into neural circuits that became your beliefs.  These are the fundamental assumptions upon which you build your world.  You do not have beliefs – they have you.  Your beliefs are firmly rooted into the assessment and pattern-making machine called your brain long before you can think or reflect back on what you believe.  This is called your historical internal dialog.  When you experience fear or impulse in trading, it is this self limiting internal dialog that has hijacked your mind (that is supposed to be trading impartially). 

You can easily recognize its presence and the resulting unfiltered opinions and judgments by walking down a crowded street and “people watching”.  Notice that automatic assessments fly into your perception as you watch people.  Before you know it, entire stories are made up that “explain” circumstances as you simply watch people passing by.  There is no proof for your automatic assessments – they simply show up as your thoughts.  They are so familiar to you that you do not ever notice them – and this is dangerous for the trader.  And even if there is no proof to support your thoughts, biases, and beliefs, you (without thinking) are still influenced to believe these seemingly random thoughts.  This is called implicit (unconscious) biases.  In trading, traders actually act on their ungrounded assessments all the time.  This form of mindlessness is dangerous.  

Think about the last time you experienced worry as you were trading (say, pulling the trigger after a string of losses).  In the emotional state of worry the trader fixates his mind on perceived negative potentials.  The potentials to which he becomes fused are no truer than any other thought running through his mind – but they are not questioned because they are not observed.  When in mindlessness, the trader does not know to question the automatic negative assessments that rise from the emotional state of worry.  Your thoughts represent core beliefs about the self that exist in the background of your trader’s awareness.  Until the trader (you) learns to bring his thought life into awareness, he remains a victim to historical and automatic ways of perceiving the world – whether they are effective or not. 

In developing mindfulness as a psychological skill specifically for trading, you begin to examine your thoughts in the midst of trading, looking for the underlying biases and self limiting beliefs (beyond what the emotional state of fear feels like) that drive your trading and that blind you to other possibilities.  Mindfulness has to be developed as a practice because your brain, once the thoughts become familiar, pushes them to the background of your awareness where they are out of sight.  And what you are blind to about yourself in trading will come back and bite you.

A Trader Comes Face to Face With His Self Limiting Beliefs 

What does this look like in real life?  A trader comes to me with a problem.  He has been trading for ten years and is only marginally profitable, even though he knows his methodology backwards and forwards.  And after ten years, he is considering giving up trading, despite his passion for it, because he cannot ask his wife and family to support his folly anymore.  He actually feels shame. 

He discovers (no surprise here) that he has a fear of losing that compromises his trading.  After he is able to regulate his fear, he is then able to discover the self-limiting beliefs which imprison him.  And these self-limiting beliefs show up in his thinking as a motivation “not to lose” rather than a motivation to perform well.  And to insure his set ups are geared “not to lose”, he only puts in orders at a price at which they are frequently not filled.  He ends up with small losses, but few wins.  He also sees that many of his trades would have been winners if only he had not asked for the rock bottom price. 

He knows this, but he keeps getting swept away by this historical conversation in his mind about “not losing”.  Then, in the process of developing mindfulness, he makes a startling discovery – he feels responsible (compelled actually) to take care of his parents and his wife financially as a way to feel worthy.  He has tied his sense of worthiness to his performance as a trader.  

His trading performance has become a measure of his personal sense of worth.  This is a set up for disaster.  And here is the recipe: 

As he watches and evaluates set ups, the trader suddenly experiences a flashing image of a trade going bad on him.  Simultaneously, he feels this as a shrinking in his gut.  Then he becomes aware that his thoughts have turned to self doubt – “are you sure?”  The internal conversation of hesitation takes over his trading performance.  Out of this, he seeks a rock bottom price or more confirmation before he will enter the trade.  He is now trading “not to lose”, which ensures he will lose.  In this trader’s case, it means that his loss will be small if he gets into the trade at all.  

This is the anatomy of an emotional hijacking.  Most traders have these trains of thoughts streak past them as a blur.  They are never examined, nor confronted.  In mindfulness training, the trader learns how to slow his thinking down so that he becomes aware of what thoughts are actually coursing through his mind as he trades.  

This is important.  If these thoughts are fear based, they will produce a self fulfilling prophesy that dooms the trader’s state of mind into victimhood – a bad choice for trading.  Once you can emotionally regulate yourself, mindfulness becomes open to you as an evolving trader.  In the case of the trader in the vignette above, he realized he had been gripped by an internal belief that swayed him to trade NOT TO LOSE, rather than trading to win. 

The self limiting belief, “you’ll lose if you risk”, was unmasked and he could challenge the fear behind it.  In confronting this embarrassing self limiting belief about himself, the trader developed a new, empowering belief about his trading –“I am a manager of risk.  It is probable that I will win.”  This belief, once it was firmly rooted into his core beliefs, led to much more productive trading.

With Mindfulness, Beliefs become More Fluid 

As traders develop their capacity to be mindful, they begin to understand that most of our assumptions are really just automatic assessments that have taken on the power of belief over time.  As we free ourselves from our self limiting beliefs, we open ourselves to re-organizing our beliefs so that we become far more powerful users of our platform and methodology.  Trading takes on new meaning for our lives.  And, it becomes a tool for the creation of an evolving life. 

This process begins with a trader developing the skills of emotional regulation.  No change in self limiting beliefs is possible until then.  Next, mindfulness is developed as a skill so that the trader becomes an observer of his internal struggles rather than its victim.  Later, the trader learns how to move beyond the prison of his self limiting beliefs and find powerful parts of himself that he uses to rebuild the "committee of the mind".  Instead of the trader’s mind being controlled by fear and self doubt as he trades, he is able to bring to his trading the elements of himself that give rise to disciplined, impartial, and courageous thought.  Trading becomes a very different experience.  The mindful trader is able to embrace uncertainty from a very different, and effective, state of mind. 

            The brain that the trader brought to trading, rooted in short term need for control and survival, simply is not up to the task of Probability management.  It is prone to “flipping out” when it experiences Uncertainty with real risk on the line.  There is nothing wrong with it – that’s just the way it evolved.  Good for survival in the short term, but bad for engaging Uncertainty with a calm and disciplined mind.  That mind is not natural, but it can be built.  And it is the mind that brings success in trading. 

The question is whether you get over your ego’s need to win, be in control, and be right – or try to force the reality of the markets to your way of thinking.  Ultimately you do not control outcome.  And as long as you cling to the need to win, control, and be right – you will miss the opportunity to develop the trading mind for success.  In that mind you realize there is only one thing that you control – the mind you bring to the moment of performance – the NOW.  This is the edge you have been seeking.  It will free your inner trader.

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