​Mastering Trading Psychology

Breaking Free from Self-Sabotage: Learning to Master the Trading Mind

Self-sabotage – it’s one of the most frustrating hurdles you face in becoming a consistently profitable trader.  Just when you start putting good days, weeks, and/or months together, you shoot yourself in the foot, again.  All of a sudden, all that good trading just vanishes, and you return to giving back what you have worked so hard to gain and sabotage yourself.  The eerie part of self-sabotage is that it happens just when you think your trading is finally coming together.

What’s behind self-sabotage?  It seems to come out of nowhere, but when examined closely and courageously, there are several discernable patterns that emerge.  The problem with self-sabotage is that often the trader does not “see” the cause because the trader’s mind has cleverly camouflaged the problem from his/her working awareness.  It is only noticed when the ambush is already in progress. 

Excitement Leading to Overconfidence

After paying your dues on the trading journey over the years, it’s nice to actually start making money.  Suddenly, instead of consistently losing money or treading water, you’re actually making money.  It feels good.  After all those years, you have finally figured it out and you start winning regularly.  You can feel the confidence beginning to build.  It’s exciting to see all the pieces start to fall together.  It feels good to win.

And therein lies the problem.  That “feeling good” mood is actually the chemistry of euphoria or overconfidence.  It is this very excitement that is dangerous for the trading mind.  Why is feeling good such a bad thing?  After all, shouldn’t you “feel good” when you are winning?  No, you shouldn’t…not while trading.  The trading mind is emotional state dependent.  And excitement and euphoria lead to a kind of thinking that minimizes risk and exaggerates reward.  This is not the emotional ground for the mind that is effective in trading. 

Trading requires a disciplined and patient mind.  Yet winning tends to produces a sense of excitement which allows false confidence to creep into the mind that trades.  Without ever noticing the shift from a disciplined patient mind to an excited mind (because it is so natural to want to feel good), the trader gradually sets him or herself up for self-sabotage.  In the excitement of finally winning, the trader starts “feeling good” as he/she trades.  In doing so, the disciplined patient mind morphs into an overconfident mind rooted in the excitement of feeling good.  Without ever seeing it, the trader’s mind is no longer making the risk and reward decisions from a position of a disciplined and patient mind.  Instead the excitement of winning has lured the trader’s mind away from what brings success in trading.

The moral to the story is that you can “feel good” about your trading – just not while you are trading.  When trading, “feeling good” is dangerous.  After you finish trading for the day, feeling good has its place – just not while trading.

Letting Greed and Lust Compromise the Trading Mind

Have you ever noticed that when you win (particularly if it is a good streak), you want more?  Greed sneaks into your mind and you feel the lust for power and winning taking over.  Traders don’t talk about lust very much.  But if you have ever chased trades or been driven to win, then you know how the emotion of lust feels and the compromised mind it produces.

The emotions of greed and lust can lay dormant for periods of time during trading, particularly when wins are fairly small and typical losses are scattered among the winners.  But notice what happens when the trader, prone to impulsiveness, gets a sizable winner or experiences a streak of winners.  Because so few traders are trained to be on the lookout for greed and lust, they are unprepared by the impact that winning has on the triggering of greed and lust. 

Without observing and regulating these emotions, the trader’s mind is subtly hijacked from being capable to manage the risk and reward balance in trading to lusting after wins and profits much like a gambler is hooked by a good win or series of wins.  The casino knows that it has the odds in its favor, but the gambler (or trader) under the influence of greed and/or lust no longer sees probability as something he or she is managing. 

The lust is in charge now and the trader trades from impulse.  This is the cornerstone of revenge trading, chasing trades, and over-trading.  Again the lesson here is that at one moment the trader worked from a mind capable to manage risk.  It is the big win, or the anticipation of a big win (or series of wins) that triggers the lust for chasing the trade.

Believing You Do Not Deserve Success      

It seems like a crazy idea until you look at it closer.  Why would you possibly be trading if you were not pursuing the potential of making a good living?  Yet when traders get past the surface talk of what they believe, their performances tell another story.  As a trader digs deeper into his or her beliefs about money, he/she encounters a number of obstacles to success.  It’s subtle, but once someone has repeatedly hit the sabotage barrier, they begin to have to look at their beliefs in action – not the talk of beliefs – but the performance of beliefs.

It’s common for traders to repeatedly fail at a particular threshold.  An example – several years ago I worked with a trader who traded with a high six figure account.  He was a good fundamental trader, but every time his account hit seven figures, he would have a spell of bad luck and fall back into six figures again.  This pattern had been going on for a number of years.  After really examining the evidence, he came to realize the pattern was more about him and his beliefs rather than his actual trading. 

It came down to a belief about what he deserved.  He grew up in a family where the family rules dictated that no one deserved a million dollars.  That family rule about money habituated and became pattern – totally outside of his awareness.  But when worked with and changed, his account grew into the seven figures again, but this time it did not fall back as it had done in the past.  He had changed his beliefs about deserving - from what he learned in his family history to a new belief.

Trading is going to ferret out your deepest beliefs about money and what mindset you bring to engage uncertainty, probability, and the unknown.  And these beliefs, projected upon the phenomena of the markets, are why many traders believe they must work hard for their money – rather than learning to be smart, effective managers of risk and capital.

 Scarcity Thinking – “It’s Going to be Taken Away from Me”

For all of you who have experienced self-sabotage in their trading – how many of you have felt, after a good period of profitable trading, that it’s too good to be true?  How many of you have thought, “This must be a dream.”  Or that something bad must be about to happen?

Many fear-based traders do have this premonition.  They have spent so much time losing, that it doesn’t feel right to be winning.  And in the mode of scarcity thinking, a deep belief that it will be taken away begins to infiltrate the trader’s perception.  Unfortunately it becomes a self-fulfilling prophesy.  And the trader begins to look for and create the conditions of sabotage.

Because trading performance is rooted in the emotions and beliefs that the trader is bringing into the moment, the trader is no longer focused on the execution of the trade.  Instead he or she is projecting his/her beliefs into the future, which is something that the trader cannot control.  But the performance in the moment becomes contaminated with thoughts about future outcome.  Out of the projection of beliefs into the future (called futurization) the trader sets the course for his own sabotage. 

The future becomes a place of losing what you have gained in your trader’s imagination.  Meanwhile the moment is lost where you, as a trader, has control of the mind you bring to the management of uncertainty.

Not Willing to Take a Loss

After finally learning how to trade and recognizing that taking losses is part of the game of trading, traders often forgets how to lose well.  They begin to believe they know how to trade.  And they get comfortable with being a “winner”.  The ego is stroked and they start believing that they know how to win – and forget that knowing how to lose well is part of winning.  This sets the trader up for sabotage.

Their game changes.  While they were becoming consistently profitable in their trading, they learned how to take losses and keep them small.  But as they moved into consistent profitability, their internal story changed.  They began to think of themselves as a good trader.  And in their belief system, a good trader should be able to do things that unprofitable traders cannot do – like pull a winner out of a loser.  “Just give it a little room.  It will turn around.  I know how to do this.  Just wait and see.”

This is where the real submerged belief of needing to win to show competence is revealed.  The trader who has tasted consistent profitability deludes himself into believing (with his new skill) that he can turn around a trade that has gone bad on him – instead of consistently following his rules.  This is the set up for sabotage.  In truth, successful trading has a lot to do with managing losses.  But it is easy for the trader to fall into the ego trap of believing he can make things happen – rather than letting things happen. 

Getting to the Next Level

Part of the growth of a trader is to learn from his mistakes.  Nowhere is this more evident than in self-sabotage.  The growth comes in learning to look at the sabotage as a correctable psychological mistake that has to be addressed.  And much of the problem is the trader’s concept about winning.

Everybody is focused on winning, as if a trader can control whether he or she can win.  In truth the trader has no control over outcome…but way too much time and effort is focused on winning.  Both evolution and psychology conspire to create a powerful obstacle to being a successful trader.  Human evolution’s success is built upon being able to control both environment and outcome as a survival condition.  In the world of our ancestors, where survival was a short term quest, this trait got wired into the human experience.  It was useful in a dangerous world of long ago.  But today there are no lions, tigers, and bears lurking around in the environment.  However the trait remains and ends up showing up in trading whenever there is risk involved.  This trait triggers automatically out of generations of adaptive responses to the danger of uncertainty.

This short-term survival instinct is alive and well every time a trader avoids getting into a trade for fear of losing control over outcome.  It is there every time a trader experiences the urgency to act before the opportunity is gone.  Traders have to learn to calm these hardwired reactions in their trading.  Keeping the body and brain calm becomes a necessity in order to move from acting on survival instincts and, instead, move towards a probability-based mindset where thinking is not dominated by short-term survival wiring.

It is the psychology of winning, though, that really needs to be examined.  Included in this notion of winning is also “not losing”.  Culturally we are shaped to want to win in competition.  And traders enter the arena of trading with the beliefs that they are competing to win against the markets.  The problem is that on a human interaction level in life outside trading, humans can focus on the desired outcome - winning.  But in the trading environment, controlling winning is not possible. 

The markets are simply too vast to control outcome.  But traders persist in believing they can control outcome.  They trade to win or trade not to lose in an effort to extract capital out of the markets.  And, no matter what, they do not want to be a loser.  So focused they are on winning, traders do not see the value in becoming good losers.  Yet long term successful traders are very good losers.  In fact, they “win” by minimizing losses.  When they see that the trade has little probability of working out in their favor, they minimize the loss.  This is simply the probability mindset that is necessary in successful trading. 

The probability mindset is focused on performance, not outcome.  This is what the developed mind has learned.  The old mind is possessed to win or not lose as a survival strategy that has become psychological trait.  The new mind is focused on managing the process of the trade (what might be called “Doing your job”).  Short term drivers are still present that traders will always have to temper.  Yet with training and experience, a new probability-based mindset performs in the moment rather than falling back to the old survival-based mind.

It is here that sabotage can teach the trader – if the trader is willing to listen beyond his or her survival instincts and a psychology developed around winning and not being a loser.  That psychology does not work in trading.  It has to evolve into probability management.  Your trading account will tell you how well you are accomplishing this monumental task. 

First, find out what’s behind the self-sabotage.  It will be a mixture of inherited biology and an adapted psychology of winning.  Once you have discovered this, you have the opportunity to learn how to manage your biology so that you do not act from survival instincts.  Then dig into your psychology of winning beliefs and recognize the need in trading for losing well.  Focus your mind on performance and the beliefs behind the performance.  This is where the magic is.  

​Articles on Trader Psychology by Rande Howell, Trader Psychologist