Building a Winning Trading Psychology Mindset

Mastering Trader Psychology

The Paradox of Winning vs. Performing

Your understanding of winning is going to have to change to build a “winning” mindset for trading success.  No matter how effective your past mindset has been in producing success in other areas of your life, that very same mindset, when applied to trading, will no longer drive the engine of success.  It does not mean that there was something wrong with it (obviously it has produced success in other areas of your life).  It simply means that it is not suited for the demands of effective trading. 

Consider the hunting practices of the African Lion and the North American Cougar.  Both are apex predators – they are the “top dog” in their environments.  Both have evolved specifically to hunt in their respective worlds.  But if you took the lion and forced it to hunt alone in the forests of North America, the lion would starve even though the cat is the apex predator on the African savannahs. 

Why?  First the lion is built to hunt by aggressively stalking, then chasing, its prey.  Second, it also hunts in coordinated groups where they take large losses due to hunting injuries.  Remember, they are getting kicked and gored by large animals as part of the cost of their hunting strategy.  Their “winning” ways include making things happen by chasing a lot of dangerous animals.  To cover their losses, they have to breed a lot, so that they can maintain their numbers (their capital).  You may think of the African Lion as the supreme alpha, but they have really evolved to participate in a particular environment.  If you put one in the forest of America, the African Lion would starve, though it is an apex predator in its world.

Meanwhile, the American Cougar (also an apex predator) is a solitary hunter who cannot afford heavy losses.  While the African Lion is a stalking and chasing predator, the American Cougar is an ambush predator.  It climbs a tree, sets up a blind on an overhanging limb, and patiently waits for the white-tail deer to set up in its trap.  The cougar patiently waits to see what the forest will give it.  The deer shows up in the set up and never sees the attack coming.  The cougar springs from its hidden perch and snaps the neck of the deer.  There is little struggle and injury, so its losses are small.  If it does miss the deer, the cougar does not chase after losers.  It accepts the loss, climbs back up the tree, and sets up again.  It knows the patterns of the deer and waits patiently for another deer to set up.  Its ratio between winners and losers is high, making it a profitable hunter.

Notice that both the African Lion and the American Cougar are successful apex predators.  Both are alpha.  Both are adapted to their environment.  Neither can change their ways.  They are stuck with their instinctual programming.  Unlike humans, they are inflexible.  But humans, traders in particular, are not stuck in their ways.  They can willfully adapt to new conditions.  And trading demands that you adapt.  Stalking and chasing is not going to work in trading as many alphas find out, no matter how successful it may have been in past endeavors.  Trading is simply a different environment where you must adapt or perish.  The patience and ambush (waiting for the markets to come to you) of the American Cougar is the successful hunting strategy that works for the environment of trading. 

Evolving the Trading Mind

The human brain evolved to focus on controlling outcome (controlling the environment), making things happen, winning (and not losing), and finding causal patterns that predict outcomes (predicting the exact bottom).  This mindset helped humans to grow into the beings we are today.  Back then, life was dangerous and there were numerous times that threats appeared that had to be dealt with either by avoidance or aggression.  If it was not in control, humans instinctively experience danger.  The very instincts that caused our ancestors to have survival success, now work against you in the trading world.

Your survival instincts literally are killing your trading.  The human brain, on an instinctual level, cannot tell the difference between fear (a threat to self) and Uncertainty (unpredictability).  In trading being in control is an illusion.  You are not in control over outcome.  Despite your bias toward winning (which you cannot control), a trader is going to lose a good bit.  But it’s like the African Lion and the American Cougar.  The lion, in its winning strategy, takes heavy losses and requires constant resupply of capital (high birth rate) to cover its losses.  While the American Cougar takes only small losses in its winning strategy.

What You Can Control

Human survival instincts are driven to control outcome (win) and not lose – both of which you have no control over.  But the trader does have control over one very important thing – the mind that the trader brings to the engagement of Uncertainty.  Evolution gave us a mind that cannot separate Uncertainty from Fear.  But we, as humans, can volitionally redesign how our mind responds to Uncertainty, winning, and losing.  

The winning trading mindset is very different than the one that is traditionally taught.  You do not visualize making a winning trade.  Instead, you focus on performing.  The winning trading mind engages Uncertainty, not with an aim of winning or not losing, but staying focused on the moment of performance.  This is where the psychological edge is found.  You are letting go of what you cannot control (winning or losing) and embracing what you can control – performing in the moment.  You bring a guess (hypothesis) of what you figure will happen.  It should have probability on its side.  And if that guess proves right you stay in the trade until exit.  If the guess proves wrong – you get out and take a small loss. 

That is performance.  Winning and losing were not the factors that drove your thinking during the process.  You congratulate yourself for following your rules, whether it was a winner or loser.  You performed well. This is the psychological edge you need to drive the statistical edge that your system gives you.  Together, they extract more capital out of the markets than you give back. 

Winning, in this state of mind, becomes only landing on the right side of probability from your perspective.  Winning, in the moment, is not associated with conquest or feeling good – this takes you out of the traders’ state of mind and is bad for trading.  Losing only means that you have landed on the wrong side of probability, relative to you.  If you followed your rules and in retrospect, you would take the trade over again, you practice gratitude, rewarding yourself for your performance.

The winning trading psychology mindset is very different than traditional ways of understanding winning and losing.  The alpha mind, with its need to win, control, and make things happen, will blow up accounts.  And learning how to lose well is important to the development of the successful trading mind.  Keeping losses small is a critical task in which to become competent.  Without this ontological shift, becoming a consistently profitable trader stays only a dream.  The “winning mindset” will be reflected by the growth of your trading account.  Until this shift in the understanding between winning and losing becomes a standard practice, you stand in your own way in your journey into trading.  Learning this lesson is essential. 

Articles on Trading Psychology by Rande Howell, Trader Psychologist