Articles on Trading Psychology by Rande Howell, Trader Psychologist

Belief, Trust, and Faith - The Integral Foundation of the Rock Solid Trading Mind

Every day you get suited up and prepare yourself for trading.  Every day you face uncertainty knowing you and your trading system are going to be tested.  Do you have what it takes to stay the course and maintain composure in the midst of unpredictability?  Do you have “it” in you?  Do you have the factor that keeps your head cool even after a string of losses?  Ultimately, trading is going to test you.  It is going to reveal the most fundamental beliefs you hold about your capacity to engage the uncertainties and challenges of not knowing if your performance will produce a winner or a loser.  It comes down to faith in your process to push through doubt.

What does faith have to do with trading?  When you first hear the word “faith”, typical biases usually pigeonhole it to be about spirituality or religion.   What happens if you were to expand beyond that and rethink your understanding of “faith”?  What if faith also applied to the way you manage the uncertainty found in trading?  Actually, it is one of the core components of a sound trading mind.  If you are confident in your approach to trading, then you have great faith in your trading. Faith, as a practice, starts being associated with confidence and discipline then. Suddenly, faith can be seen as a mental skill needed to manage the emotional mind that trades.

First, let’s take the word faith out of the narrow context of religion and create a new understanding for trade management.  Instead, let’s define faith more broadly and then specifically for trading. 

Faith is a felt sense of trust in something that you can rely upon and that can carry you through times of uncertainty with confidence. 

That trust earned through experience becomes the ground for such an unshakable belief that you are able to maintain confidence in the process to see you through troubled times to better times.  Specifically in trading, it would mean that you trust your methodology and system to reliably give you an edge in the markets over time even when (in the short term) it is not producing the kind of results you want.  Faith would also mean that you trust in yourself so that you are able to maintain discipline and humble confidence in the face of adversity. 

Seen in this way, faith becomes a bridge between your current emotional experience in the short term and your long term belief in your system…. and in yourself.  First, let’s talk about your faith in something more mechanical that organic. 

Faith in Your Methodology and System

A trader of great faith learns to trust his/her methodology even when it is not producing winning trades in the moment or over a cluster of trades.  Based on a belief rooted in experience, the trader “knows” that his/her system will deliver over time.  He or she believes, (based on the evidence of past performances) that the process he uses can be trusted to deliver good results over time, even when hitting a spell of trades that do not work out.  Out of this confidence the trader believes in his system and has no reason to change things.  He knows that over time the system will in fact give him an edge in the markets.  The trader’s job is to maintain faith in his system without faltering - even when the going gets tough.

This kind of faith is typically based on experience.  Practically all traders start out in simulation until they are convinced that their system is consistently able to extract capital out of the markets.  That experience grows the trust that a solid faith is built upon.  Traders will also back-test their methodology to prove to themselves that their system works well enough to give them an edge.  Using both simulation and back-testing to work out a dependable trading strategy, a trader comes to believe in his system and that it will reliably perform under real conditions.

He now believes (based on evidence) and trusts that his strategy will work successfully in the markets.  He has become confident and has faith in his methodology and system.  And if short-term preservation was not wired into his genome as a trait along with those pesky short-term emotional programs needed for survival, this trader would consistently bring a winning edge to the management of uncertainty.

Faith in Yourself to Perform in the Face of Possible Failure

In the acid test of performance, most traders discover that they don’t trust themselves at the deepest levels of operating in an uncertain environment.  In truth, few traders trust themselves under pressure.  They don’t have rock solid faith in themselves to persevere through the ups and downs required for managing uncertainty.  At the level of performance where outcome is uncertain (the trading environment) they do not believe in their capacity to engage probability and prevail over time.

Let’s take a deeper look at this phenomenon of not trusting in yourself.  What is so hard about clicking a mouse?  What is so hard about risking a small amount of capital on a micro contract or lot?  The amount of capital that is put at risk is really small for many novice and experienced traders (less than a dinner out), but the emotional reaction is almost like confronting a life and death situation.  In a logical world it makes no sense.  But in the real world of trading, this kind of exposure to minor levels of risk produces intense emotional drama that hijacks the trading mind.  And if this powerful emotional reaction to risk is operating in most traders, imagine what happens when traders start sizing up and engage risk and uncertainty beyond their comfort level.

What’s the problem here?  How can traders who are motivated to win have such trouble when things get unpredictable?  The problem is both biological and psychological in nature.  First let’s look at the biological foundation for not believing in yourself.  The most powerful instinctual force at work in your biology, brain, emotions, and mind is self-preservation in the short-term.  This is often called survival instinct.  This survival instinct and the emotions that govern its manifestation are not built to consider long-term appraisal (high probability trades with a high risk to reward ratio).  The survival instinct’s only consideration is survival in the moment at hand (“you could lose”).  And it is biased by millions of years of programming towards negative appraisal of a situation – no matter how good the odds are.  That chance of losing outweighs probability-thinking every time in the emotional brain.

That means that no matter how good your risk to reward ratio calculation for your trade is, the emotional brain (that operates out of this survival instinct) only sees the risk involved.  If the upside is not immediate, the reward of potential capital gain is minimized leaving the emotional brain to perceive a threat to the biological survival of the self. 

This is when the fight/flight response is triggered in the primitive brain.  Suddenly that small risk in your micro lot has been elevated to the status of biological threat in the emotional brain governed by the self-preservation instinct operating in the background of the brain at all times, waiting hyper-vigilantly to detect any danger and to react to it.  The sympathetic nervous system revs up preparing the organism (that’s you the trader who now believes he is in the jungle of survival) to avoid the perceived threat through fear or attack the threat through anger.  This is the biological basis for freezing, distracting, or hesitating at entry or attacking the threat in revenge.  Either way, the biology of the trader has betrayed him, causing him to manage probability from the short-term survival mode. 

This short-term bias of self-preservation has to be mastered if the trader is going to realize his financial dreams of trading.  Traders under-estimate the power of this instinctual survival drive and do not prepare for it.  Once a trader recognizes that there is not magical fix to this instinct, he can learn to calm the tendency of the emotional brain (particularly the amygdala of the limbic system) to over-react to perceived threat.  The key here is to separate how your biology reacts to uncertainty.  It comes with default programming to fuse uncertainty, vulnerability, and fear into one gigantic trigger.  With practice in regulating emotion this association can be deconstructed so that uncertainty begets psychological discomfort rather than immediately triggering to biological threat.  All successful traders learn this one way or the other.

The question remains:  what do you do about vulnerability?  Remember vulnerability is associated with uncertainty and fear on the level of bias.  And that vulnerability is the gateway to the psychology we bring to the management of uncertainty – performance psychology.

The “Manly” Approach to Vulnerability – Disaster Strikes

Men are taught to “man up” to their fear.  They are supposed to be tough.  Emotions are not supposed to get to a real man.  They are supposed to be able to laugh at their fears.  After all, you see it in the movies all the time.  You see it in the gaming industry all the time.  And above all else, men are supposed to be rational, able to think through things logically, even under pressure.  And the same applies to women to a smaller degree.  But since men make up the vast majority of traders, we will focus on them in this article.

This myth of the heroic man comes crashing down when exposed to the uncertainty of trading.  All their stories just don’t seem to work when projected upon the markets.  And the trading gods just don’t seem to care that the man has built a false sense of self that he hides behind.  This false self may have worked very well before trading.  Many very large and in charge egos have come to trading believing they will prevail and that they will make things happen.  And many men have given up large chunks of their capital trying to maintain an illusion of control over their emotions and circumstance.  The failures in trading are littered with people who have brought this attitude with them from another domain (where it may have worked very well) into trading only to find that the very successful mind that they brought to trading is not going to be the mind that produces success in trading.

Change is required for success in trading.  Traders have to give up their fragile egos built around controlling outcome and making things happens.  It feels good to win.  Yet, getting sucked into over-confidence by winning is a sure way to give back your capital (and more) when a “winning attitude” is applied to trading performance.  And after blowing up serious capital trying to make things happen and compounding losses by trying to make your money back, traumatic memory is created.  Then the trader learns to fear getting into trades in the first place.

Turning toward the vulnerability and mastering the self-limiting beliefs behind your fear of vulnerability is the fork in the road for traders.   In trading there is no avoiding personal feeling of vulnerability in trading.  Power trips do not work long and lead to more traumatic memory to deal with.   So turning toward the vulnerability and mastering the sense of inadequacy, of not mattering, or not deserving, and of powerlessness is the warrior’s way to mastering the trading mind.  Every day you are stepping out in faith believing in your trading system and yourself to manage uncertainty.  It is unavoidable in trading.  Your trading account will tell you about the health of your faith.  Now it is time to develop the discipline of faith in yourself to drive your trading system in the environment of uncertainty.  What is required is a mind that has faith in your long term skills to engage uncertainty.  Faith is not an emotion or a falsely created feeling – it is a mental discipline that gives you an edge in mastering short-term emotional programs that will derail your trading if not mastered.

Trading knowledge without faith is lame.  It falters under pressure.  The real question is:  When under pressure to perform and with money on the line, do you believe in yourself and your process so that you can ride out the emotional storms of trading?  Let your trading account answer for you.  If you have not got faith, you better learn to trust in yourself and your abilities when push comes to shove.  Trading then becomes the transformational vehicle for learning to believe in and trust in yourself. 

Mastering Trader Psychology