Articles on Trader Psychology by Rande Howell, Trader Psychologist
Traders’ well-intended plans for success slam into a brick wall when those plans run into the reality of Uncertainty – where risk and opportunity collide. It is rare that traders are prepared for this variable. Then the old brain (the ancient Emotional Brain), considering only survival in the moment, turns those carefully crafted plans into mush in a matter of moments. In those moments, your desire to win (make money) can turn into euphoria where you believe that the good times are going to roll on forever. Until they don’t. And for some reason what you don’t understand causes you to over-trade, with disastrous results. Conversely, you are looking a trade going south on you and you (suddenly and without reason) don’t want to take that loss. And you begin moving your stop in the desperate hope that the trade will turn around if you give it some room. (And you know how that turns out.) Lastly, your desire not to lose keeps you out of perfectly valid set-ups that gave you good profit potential. In these cases, you are not living in the moment. But you are anticipating a dangerous future, because that is the job of the Emotional Brain.
The frustration builds. What is the barrier you keep hitting that blows up the potential you know you have as a trader? The answer starts with a clarification about your brain (the living organism you are) and the mind that hovers above the brain, as if it were separate from your flesh and blood. That is the tragic flaw. It seems self-evident that brain and mind are separate. It is hard to conceive of yourself as part animal (driven by instinct with no input from thinking) and part conscious awareness. Yet, your mind (in all its perceived glory) emerges from the brain of a highly advance animal. Let yourself sit with that statement for a moment and really feel how disconcerting it is. The highly evolved ancient reasoning mind that you associate with thinking is generated by your Emotional Brain and it is resistant to the notion that your mind is rooted into your brain – and is not separate. Think of them as Siamese twins. And therein lies the problem with running into brick walls.
Your wonderful plans for winning in trading are generated by a Thinking Brain that does not know that it is a product of the Emotional Brain’s shaping of it. What does your Thinking Brain want out of trading? It wants to make money by winning and have a great life. What does the counterpoint to the Thinking Brain (your instinctual Emotional Brain) want – to survive this moment? It is not considering your long-term benefit, but it is built to survive this very moment. And if and when the Thinking Brain gets in the way of this ancient survival instinct, you hit the brick wall again. More than 95% of the decisions you make every day are done automatically without your conscious awareness. They are responses that have turned into emotional patterns from the brain’s experience. Once they go on automatic, you are not aware of them operating in the background. They are so familiar you do not notice them. And they are killing your trading.
Our ancient ancestors truly had a dangerous life. Winning meant living. Losing meant death. Out of the stark reality that the Emotional Brain of modern humans is shared with our distant ancestors, routines and patterns became hardwired into our response to the Uncertainties that Caveman encountered - particularly about life (winning) and death (losing). To our Ancestral Brain, uncertainty was most likely dangerous. Think about the way you take losses. It gets you at the very core. Yet losses are natural in a successful trader’s life. Successful traders have learned how to take losses very differently than the way they reacted to losses initially. Their Caveman Brain did not want to take the loss because it became the predictor of death. That same pattern has been passed down from our Caveman ancestors to the very modern mind that you bring to trading. And the Caveman Brain (with its instinctive response to the dangers of Uncertainty) trumps the modern new-kid-on-the-block Thinking Brain when Uncertainty and the potential of loss triggers survival patterns. The same goes with over-trading, revenge trading, managing trades, and fear of entry.
Keeping your Emotional Brain and your Thinking Brain separate from one another has fomented disaster for many a trader. I acknowledge that no one told you about this until now. But that doesn’t matter. The real key is whether you are going to put the Emotional Brain and the Thinking Brain back into the original box that was delivered to you when you were born. Or do you insist on maintaining the illusion of separating brain from mind. The brick wall you keep running into does not care.
Thinking Brain and Emotional Brain Reunion
The Emotional Brain has always been there participating in every decision you make. As the stress (Uncertainty) ramps up, the Emotional Brain takes the lead in your choices. You must understand what drives the Emotional Brain. Simply stated, it is staying alive. It is hard to understand this prime directive of the Emotional Brain because we modern humans tend to look at the problems of survival from today’s perspective. There are no lions, tigers, and bears lurking in the shadows to gobble us up. But not too long ago (less that 12,000 years ago), this was the norm. Staying alive was the prime directive of the brain. Otherwise, genes did not get passed on into the future.
To accomplish this prime directive, emotions were developed by evolution to coordinate interactions between the organism and the environment. In today’s world of trading, think of the organism as the trader and the markets as the environment. Emotions became biological action potentials that would automatically trigger any time there were changes in the environment, particularly bad ones. These were the life-or-death moments that had to be reacted to instinctively, rather than analyzed. If early man thought about them, it was too late. So, they became instinctive and reactive.
This is the very problem that happens in your trading. Though there are not any imminent dangers like our early ancestors faced, the Emotional Brain does not know that. It perceives loss as a threat to its life. Understand, this is something that is happening biologically. It is not cognition. Thinking only shows up much later, after action has already taken place. This is known as an emotional hijacking. Traders are often advised to leave their emotions at the door – which is an impossible thing to do. An emotion triggers any time there is a change in status that involves the organism (the trader) and the environment (the markets). Status is always unpredictable and changing when managing the Uncertainty of the markets. Therefore, emotions are constantly triggering as you attempt to manage the Uncertainty of risk management. You may push the emotion down for a while. But as you increase the stress, the emotion is going to surface.
This is where emotional regulation is a “must” skill for traders to develop. Once you understand that emotions are biological in nature and not psychological – though they take over the psychology of the trader – a new way of managing emotions becomes possible. You, as conscious participant, and your Thinking Brain can learn to manage the intensity of an emotion by the way you breathe and hold tension in your body. Your breath and the body’s tension are literally part of the way emotions operate. By managing the way you breathe under pressure and the way you hold tension in your body when stressed, you can control the intensity of the emotion as it erupts, so that it does not reach a critical moment where it becomes chemistry pulsing in the body. This is a critical moment. And every trader who wants to win consistently needs to learn how to regulate the intensity of the emotion. This is the beginning to the Thinking Brain/Emotional Brain partnership.
From Emotion to Belief
Emotional regulation gets you to the door of the mind, which is an achievement in itself. But the next step is to discover the limbic beliefs (hidden emotional beliefs) that you have about your capacity to manage encounters with Uncertainty. Don’t accept what you think these beliefs are. Your Thinking Brain will make up alibis for what the Emotional Brain has already decided. Instead, look to your trading account. It will tell you the truth. It will reveal what beliefs actually drive the action of your trading. The more effective those beliefs are – the healthier your trading account will be over time. The converse is also true. You project your beliefs about your capacity to manage Uncertainty onto the markets on every trade you make. The less effective those beliefs are about your capacity to manage Uncertainty, the more problems you will find in your trading account.
You will have to face and change these beliefs on an emotional level if you seek to win consistently. It is in your performances that they are revealed. Learn from them. In mindfulness you learn that you and your beliefs are not the same. Your beliefs about managing Uncertainty simply represent one organization of your potential as a human being – for better or worse. The power you have is to bravely turn toward the beliefs that get in your way, take responsibility for them, and set about changing them to a new set of beliefs that drive your performances in the face of Uncertainty. This is to be human. Other animals do not have this choice. We alone have a conscious self that can change the operational beliefs that drive our perception of the world. And from that perception comes how we act in the world. This is where peak performance comes from. You control your performances based on your beliefs, rather than the outcome – which you never had control of. This is the new winning required for success in trading.