Articles on Trader Psychology by Rande Howell, Trader Psychologist
Do the math and you discover that you can make a whole bunch of money trading. And traders get intoxicated dreaming about the pot of gold at the end of the rainbow. It’s like a spell is cast when they first start learning to trade and they start pursuing the dream of prosperity thinking – they literally believe that they can “think and grow rich”. They start seeing the possibility of financial freedom and personal freedom take hold of their goals in life. Then with a dogged pursuit, they clamp their attention on making money to the exclusion of what it really takes to perform as a consistently profitable trader for the long term. Their focus is on making money – that’s why they trade, isn’t it?
That magical spell about making money (and what it means to you) is also what causes perfectly capable traders to keep washing out of their career in trading. They are so focused on making money and getting rich, that they never see the problems that come along with that kind of thinking and believing. Recently I watched a TV series about the author Mark Twain. Sam Clemens (the real name of Mark Twain) had an obsession with getting rich. The series followed his early career as a gold prospector in the Wild West. He and his partners (and many, many others of his time) got possessed by the dream of getting rich fast. They were so blinded by the allure of striking it rich (they were prospectors) that they continued to make horrendous decisions that, in fact, kept them from achieving the very goals they pursued. They literally sabotaged themselves numerous times. Sounds like trading, doesn’t it?
Watching from the distance of time and a TV series, it was easy to see that Mark Twain’s obsession with getting rich was also his failing. But he could not see that. Every penny he could beg, borrow, or connive went straight into the pursuit of wealth generation at full speed without examining whether his methods were effective or not. And, as great an author and story teller as he was in his time, his unexamined motivations about getting rich actually kept him from acquiring the wealth he desired. He made a lot of money, but invested poorly as his poor judgment caused by his reckless pursuit of striking it rich held him back from achieving his dreams.
Doesn’t this sound like traders as a group? Trading (and its dreams of near instant wealth creation) is just another incarnation of the spell of striking it rich on a gold claim in Samuel Clemen’s day. Both are so possessed by the dream of making money that they are distracted from seeing what it really takes to be successful. For instance, Levi Strauss was also a prospector who discovered his chances of striking it rich were impossibly remote. But what he noticed is that men needed clothes built of tough cloth to do the work of prospecting. And he made a fortune selling denim-based pants and overalls. Mark Twain could not see beyond his obsession with making money quickly, whereas Levi Strauss kept his mind open to long term opportunity.
What does Samuel Clemen’s hot pursuit of striking it rich fast have to do with your trading? A lot.
Money and the Core Beliefs that Drive Your Trading
The dream of wealth, money (or capital), and your personal sense of power are glued together. And, even more importantly, you discover just how effective those beliefs are at producing wealth in trading in a way that cuts directly to the truth – the truth of whether those beliefs (that are driving performance) are effective at extracting capital from the markets or not. You see the answer in your trading account. And your trading account does not lie. It tells you the truth whether you want to hear it or not. Like Mark Twain, you may fall into the self-deception of believing that success is just right around the corner; but your trading account actually reveals the beliefs that drive your trading – if you are willing to listen.
Think about what’s behind getting rich in trading or becoming a winner so that you are making money.
Belief #1: If I make money, then I matter.
Think how often your mood is dependent upon whether you are winning or losing. Your sense of making money and your sense of mattering become tied together. Think about the twisted logic of this association between your sense of mattering as a human being and whether you win or lose. Trading is an endeavor where you have no real control over whether you win or lose. Trading is defined by ranges of probability where sometimes you land on the right side of probability relative to your interests or the wrong side of probability relative to your interests. Yet the trader wants to win and not lose. Then the way they feel about themselves comes from their winning and losing – which they cannot control. In this way of thinking/believing, controlling outcome is the magical thinking that defines your sense of mattering. Performance, outcome, and personal mattering become linked artificially.
Belief #2: My human worth and my net worth (accumulated wealth) equals my value.
Traders plunge into despair when they lose. They fight losing so hard that they throw good money after bad in the hopes that the trade will turn around. Then if they cannot “make” the trade turn around, they seek to make up for prior losses (as if they could control outcome). There is that magical thinking again where the trader gets sucked into believing that they can force reality to produce a winning trade when, in fact, the trader has no control over outcome. Their worth as a human being has become tied to their performance where they do not control outcome.
Belief #3: To be enough, I have to win.
Notice that all these unexamined faulty beliefs are based on an impossibility – that you can magically control outcome, thereby forcing winning to happen. Many traders live under an assumption that they are, at their core, inadequate. And they are trying to prove (before anyone can find out the truth) by winning that they are enough – they are adequate. Yet they are giving the randomness of the markets the edge to define their sense of being enough. I have to win in order to be enough. And if I do not win, then that is proof that I am not enough. That scares and shames the trader into pushing even harder to try to control outcome in a game where the outcome is random, even if the odds favor you. Who would put their sense of self hostage to a set of circumstances like this? Seems crazy doesn’t it? Yet traders do it every day. Do you see the faulty logic and magical thinking that possesses the vast majority of traders? No wonder traders are separated from their capital like fools from their money.
Belief #4: My trading represents my power as a human being.
Traders operating under this belief hold that they should be able to make things happen and be in control. In my work with traders, I call this group the Alphas. They are the ones who want to win and hate losing. Again, what I ask you to notice is that the trader is putting him or herself in a position where they need to be able to control outcome – which we have already concluded is impossible. But in the mind of the trader, hooked by magical Alpha thinking, no amount of evidence to the contrary is going to penetrate the faulty logic of the belief system from which the trader operates.
Why Does the Trader Hold on to a Belief that Doesn’t Work?
It seems like Einstein’s definition of insanity – “Insanity is continuing to do the same thing over and over again expecting a different outcome”. Yet to the survival emotional brain there is a logic to maintaining the status quo. Your Caveman brain is built for short term survival. And maintaining a belief that drives performance badly usually has an adaptive element that keeps the pattern alive. It is the feeling of certainty.
When we believe that something is certain, it feels like (to us) that what we believe is true, like a fact. This is what a limbic belief feels like – like it is, in fact, the truth. The actual truth is different. What the trader is actually feeling is the chemistry of certainty shielding them from the confusion and the vulnerability of not knowing. The not knowing or uncertainty (to the primitive emotional brain) is what is truly dangerous. The trader will do anything, including lying to him/herself, to preserve the sense of certainty that the magical belief gives him/her.
This kind of self-deception generally does not catch up with the person in the short term. People hold irrational positions for years in the way they understand things without ever being given adequate feedback that would push them to change their positions and beliefs. This is the problem with trading. The distance between cause and effect is much shorter than in real life. And your trading account simply is incapable of caring about how you feel. It simply keeps revealing the effectiveness or ineffectiveness of the beliefs with which you (the trader) keeps interacting with the uncertainty of the markets.
The magical belief (or the adaptive limbic belief) keeps resisting change to the belief because it is now familiar pattern. And by definition, is resistant to change. This is why traders generally burn out their capital and/or run out of time BEFORE THE BELIEF BEHIND THE PATTERN CAN BE EXAMINED AND CHANGED.
It is common for a trader client who is really turning the corner in their trading to report to me that they are trying to convince their trader friends to talk to me. But these trader friends are resistant, even though they acknowledge they are having problems with their trading (and particularly their trading psychology). They are resistant to changing a belief that has grown into a familiar pattern. If they were to examine their beliefs, they would discover that the very beliefs that bring comfort to them in times of trouble are the very ones that imprison them to stay stuck in nonproductive emotional patterns. It feels safer (in the short term) to maintain the status quo and get poor results than to change their psychology and beliefs into something new and potentially dangerous.
Their belief holds that success is just around the corner. It feels safe. It allows them to not change beliefs about managing uncertainty. All they have to do is maintain the reassuring lie. For the short-term emotional brain, survival in the moment wins and long-term change is pushed down the road to another day – where hopefully it will simply disappear. “Nothing is going to change my world.”
Waking Up to the Reality of Trading
You now know why the vast majority of traders lose money and will eventually leave trading – when their financial experience catches up with the short-term survival nature of their magical limbic thinking. It is always your choice. It is much easier to stay sequestered by comfort of short-term magical thinking and beliefs. This is the way your brain was built. And it has allowed us to become the dominant species we are today.
That brain, however, is the worst possible processor and programming for trading. You bring a brain built for short-term survival to the arena of trading – where a long-term probability-based mind is urgently needed. Do you want to adapt to the new circumstance, or do you want to continue to use limbic beliefs built for another time and place (but which makes you feel certain)? The only stakeholder in this game is you. The markets do not care. Nor do the trading gods. Do you adapt to the new world order or do you stay locked in the mindset that will keep you from the promise of success in trading?