Mastering Trading Psychology

Articles on Trader Psychology by Rande Howell, Trader Psychologist

Building the Trading Mind from the Inside Out:

What it Takes to Build a Successful Probability-Based Mind

After going through numerous articles and videos describing WHAT needs to change for a trader to develop a mind for effective trading, many traders still ask – HOW does that change actually occur?  Convinced that change does, in fact, need to happen (stuck in a performance gap or slump) – traders want to know what the process is that is used to create that changed mind.  A very inquisitive trader recently asked me that question as he was exploring options to improve his performance in trading.  He wanted to know what this change process looked like using the tools that I teach. Let’s take time to explore this question.

First, what actually needs to change? 

What has to shift is how your brain is positioned to handle Uncertainty.  Your brain, and the mind that emerges from it, evolved (first and foremost) to keep you alive in the short term.  This drive is called Self-Preservation.  Out of this biologically-driven bias your brain is built to seek Certainty (and avoid Uncertainty) and to attempt to control outcome – and it is driven to make decisions for survival in the short-term. 

Your brain and its bias for short-term survival (with its attendant certainty and control of outcome issues) has to be re-developed into a brain whose emergent mind embraces Uncertainty and seeks long-term solutions to challenges in its environment.  This is a monumental task.  You are really talking about overcoming emotional response patterns that have been established as reactive patterns for untold generations, simply because they proved successful for survival.  Not only that, but you are asking the brain to change from a short-term survival orientation towards its environment to a long-term orientation, accepting Uncertainty and even seeking it over certainty.  In trading, you are literally asking for the brain and the mind to embrace exactly was it evolved to avoid – its antithesis, Uncertainty.

That is the first order of business – simply becoming mindful what you are asking your brain and mind to do, and realizing that this is totally against the brain’s successful evolutionary strategy that has become wired into your humanness as a trait.  Then, you are going to have to develop the tools that allow you to accomplish the move from short-term survival mode to long-term benefit mode.  Let’s take a look at what is required to do this.

Second, changing the hardwired trait process that is already wired into your neuro-circuitry

The need for biological survival is the driver of the adaptation that created and maintains the short-term survival strategy that hijacks your thinking brain every time – unless you figure out a way of disrupting it.  So the first part of finding a solution to creating a brain/mind to manage Uncertainty is to disrupt and cool down the emotions that reactively trigger when you are exposed to Uncertainty.  In Traders State of Mind work this is accomplished through Emotional Regulation that is applied directly to the environment that you will be operating in – the trading environment, where uncertainty and risk are your constant companions.

Because both breathing style and muscle tension are part of how an emotion activates to changes in an organism’s environment (i.e. your trying to keep a sane mind while experiencing Uncertainty as you trade), these two aspects of emotional arousal can be used to dampen the growth of an emotion like anxiety, fear, or anger BEFORE the emotion hits a threshold and compromises your capacity to manage your mind under pressure.

Many traders report that they do breath and relaxation training but it seems to have little effect while they trade.  They forget the skills in the midst of stress EVEN THOUGH they have trained on diaphragmatic breathing and muscle relaxation outside of trading.  The problem here is that they have not trained using Emotional Regulation in the conditions that it needs to be applied in.  Because the skill is not trained to the specific environment in which it needs to be applied, the training is not habituated and is not available when you need it. 

Therefore, you find the Emotional Regulation skills taught in Traders State of Mind work are applied not just as rote skill training, but also under game conditions.  This is a powerful distinction.  Many people I consult with have learned diaphragmatic breathing as part of an overall relaxation strategy or in yoga settings.  The skills are not transferrable from one domain to the other.  If you want emotional regulation skills to show up and be part of calming emotions in your trading, they have to be taught and habituated in the environment of trading under pressure.  Otherwise, you do not have the skills available for use in trading.  So the development of emotional regulation skills is taught in the environment in which they are to be used.  Until this is done, trying to calm the mind is simply impossible.  Until you can manage emotions, managing the forces in the mind is simply beyond the reach of a reactive mind.  This is a huge difference.

The skill development of Emotional Regulation begins with a 2-3 week period of rote training.  First, the skills are taught by guided meditation outside of trading (what I call the Yoga studio).  Then they are applied and habituated in the environment of trading.  This is a start.  The trader will always need to come back to breath as a way of setting the state of mind as a practice that strives to become second nature.  From the first contact with the Traders State of Mind process (in our Courses) to the last skill taught, the skill of Emotional Regulation is the base upon which you build a new mind capable and willing to engage and manage uncertainty.

Third, Mindfulness as Observation Applied to the Noise in Your Head

Until you can begin to manage emotion, the door of the mind is not open to you.  Emotional reactivity simply overwhelms your capacity to develop Mindfulness.   Mindfulness can loosely be defined as being aware of being aware.  More specifically it is about being aware of what is happening in your mind at the moment.  In Traders State of Mind work, the brain is understood as comprised of a community of rival emotional programs that are highly competitive and cooperative with one another in an effort to become the dominant force determining the perception of the organism (that’s you as the trader).  And when that brain produces a mind, those emotional programs are given voice as thoughts in the mind.  The mind becomes a committee where these voices vie for voice and power.  If you have ever found yourself conflicted in making a decision, you have experienced these emotional programs as voices or different thought streams in your mind.  In learning how to manage these various streams of thought that comprise working awareness, Mindfulness becomes the core skill.

Learning to distinguish these voices from one another is vital in developing a mind for managing uncertainty.  It is not just noise you are hearing in your mind.  It is a struggle to determine who will call the shots in managing Uncertainty.  If the old programs, or default programing, maintain control, you will continue to make decisions based on short-term best interest of the survival instinct.  It is in reorganizing the authority of these voices to control the direction of your thinking that the Mindfulness aspect of Traders State of Mind Training is utilized.

You are taught figuratively how to “step back” out of your thoughts and recognize that you and your thoughts are not the same.  Your awareness of thoughts running around in your head is increased to the point that you can separate the destructive voices that run through your mind from the fearful ones, from the angry ones, from the disciplined ones, from the courageous ones, from the self-compassionate ones, from the clear thinking ones. 

Through the use of guided meditations (then in real time under pressure) and in learning how to distinguish the good voices from the bad, you learn how to become the manager of the mind that you bring to uncertainty.  In the same way, you learn that there is not freedom FROM emotion, but there is freedom OF emotion.  Uncertainty will always trigger the rise of emotion – there is nothing that can be done about that.  Challenges arise in the environment, and, because of that, emotions by definition will trigger.  However, by learning to discern from the different emotional programs of the brain, you start up the path towards choosing the emotions that will create the mind that engages Uncertainty.  This is the Holy Grail that few traders find.

Traders learn to apply that Mindfulness while trading.  This is where real power begins to occur.  Suddenly the trader is letting go of the illusion of control and learning to control the one thing that he can control – the mind that he brings into the moment of performance.  If the trader has an edge in methodology, this is how he brings that edge to the management of trading.  He manages the performance – not the outcome.  This is the gap between the troubled trader and the professional trader.

To accelerate learning, guided meditations are used to enhance the capacity to step back out of thought.  Much like the development of Emotional Regulation skills, Mindfulness is an ongoing process.  One to two weeks are required to develop the beginning stages of using Mindfulness as a skill.  Much like breathing, it becomes folded and woven into all the subsequent skills that are taught.  Without Mindfulness, there is no way for the trader to distinguish the various players in the mind (where the various emotional programs of the brain have been given voice in your mind as thoughts). 

Simultaneous development of Mindfulness outside of trading in the “Yoga Studio” is coupled to using Mindfulness in the real time of trading.  This takes practice and time.  You are literally waking up a dormant skill and then teaching it to become a working part of your awareness during trading.  It is for these reasons that both the Developing Traders State of Mind Group Course and the Ignite Your Spark Individual Course are purposely designed to last 2 to 4 months.  It takes this long to develop the skills from the raw potential. Without the practice time under supervision, it is difficult for the faculty of Observation or Mindfulness to be developed into a working skill.

What you are looking for is the development of more awareness while trading rather than mindlessly falling into the same habituated patterns of fear-based, anger-based, or impulse-based trading.  Without development of the Mindfulness skill, developing the capacity to create new, more effective, patterns of engaging the Uncertainty of trading is akin to hoping that you can win at gambling when you know the house has the odds.

Developing the Mind as a Tool of Trading Performance

But how do you develop the mind?  What does it really look like to develop these emotional programs (that we are all endowed with) into viable skills?  How do you reorganize the forces in the committee of the mind into a working whole? 

Most approaches to peak performance and self-development use Positive Self-Talk, NLP, enhanced focus, visualizations, and affirmations to enhance the mind that is brought to performance.  All of these have their application, but personally I have found they fall short in the moment of performance.  They may disrupt pattern temporarily, but the pattern will simply come back because the underlying cause has not been adequately addressed.

The standard default brain and mind you bring to trading is biased toward self-preservation in the short term - as you might expect from the emotional brain’s appraisal of threat while engaging Uncertainty.  In effect, you are hard-wired to seek certainty and control of outcome when exposed to Uncertainty.  This survival strategy was so effective in human development that it became part of the genetic materials passed on to future generations.  It became a trait.

So anytime the brain experiences Uncertainty, it is wired to trigger to anxiety, fear, or anger because it views Uncertainty as a biological threat.  The saber-toothed tigers of a mere 12,000 years ago still prowl our mind and we are hard-wired to react BEFORE THOUGHT to avoid or attack the threat.  Under stress, this is what happens to the trader when his mind is hijacked.

What we are doing in Developing Traders State of Mind Group Course training is to change this bias.  The default programming of the brain when exposed to Uncertainty is going to be rooted in fear, anxiety, and anger.  This training takes the same exposure to Uncertainty and re-wires the brain and emergent mind to respond with self-soothing, discipline, courage, and impartiality.  It is in the training of disrupting the hard-wiring of the reactive brain and then re-training how it responds to Uncertainty that the Traders State of Mind work differs from other work.

Working with a process called memory reconstruction, you learn how to train the brain to change the way it encoded experience into a memory so that you have access to empowered emotional programs when dealing with stress over the biased short term (default) programming.  Instead of using visualization and affirmation (where wishing is a major component) you are taught to access emotional programs that were, in fact, present during a historical performance and reactivate them in specific moments.  You are using real memory of an experience where discipline, courage, self-soothing, and impartiality were present during the experience – but where the brain did not encode them into memory – to create a mind built for effective management (rather than reactive management). 

You actually learn how to elicit the emotional cocktail of this empowered state as a skill.  Depending on the student, this takes between 2 and 4 weeks of fairly intensive work both in the “Yoga Studio” and in the environment of trading.  Remember, it is not a skill unless it can be pulled up in the environment within which you are operating.  When the student has learned how to intentionally summon these specific emotional programs, the next stage is to associate the emotional programs with symbols that resonate with the individual programs.  This is where brain meets mind.  And the community of rival emotional programs of the brain becomes the committee of the mind.  Now discipline is linked to Ruler archetypal images, courage with the Warrior archetype, self-soothing with the Caregiver archetype, and impartiality with the Sage archetype. 

This does not solve the problem of designing the mind to manage Uncertainty, but it does provide the raw materials and talent for doing so. 

The Skills to Turn Toward the Discomfort of Uncertainty

  These newly developed skills have to be honed to the conditions of trading, where risk and Uncertainty are the ever present factors necessary for effective performance.  Students are taught how to turn toward the discomfort of ambiguity and Uncertainty, not knowing the outcome.  First they are taught in simulation where they learn to turn toward their fears and separate fear from Uncertainty.  This is both biological and psychological in its nature.  In the Traders State of Mind process, this is called turning toward the Orphan and challenging the judgments of the Inner Critic. 

As students develop skills to master their fears, they begin to practice in live trading.  They learn to prepare the mind BEFORE they begin trading for engaging and managing the conditions of Uncertainty and risk.  They are no longer attempting to control outcome by force of will or by perfectionism.  They are learning under battle conditions to control the one thing that they can control – the mind that they bring to performance.  By learning to focus the mind on managing performance rather than controlling outcome (winning), they learn a different kind of confidence and control. 

They accept that control over outcome is an illusion, albeit a highly persistent one.  And that by learning to control what is within their actual power to control, they learn that they have truly developed the edge that they have been seeking.  That mental and emotional edge does not look like the edge they were initially seeking (external control), but it has evolved to what is really possible to control.

This type of learning is a process.  It is not learned overnight or by magic.  The trader accepts his biology will always seek the default positioning of self-preservation in the short term by attempting to control outcome or by the perfectionism of not losing.  This requires learning both intentionality and vigilance.  The trader learns to be intentional about the mind that is brought to trading.  And vigilance is accepted as a virtue.  If the brain and mind are left to their own devices for long and not observed, it will devolve back into the self-preservation based mind that traders initially bring to the management of trading in uncertainty. 

Even after you learn the skills and can apply them in real time, they have to be maintained.  There is no victory and living happily ever after.  In trading, the price of freedom is eternal vigilance.  The skills of emotional regulation, mindfulness, applied mindfulness, and engaging the struggle of challenges are simply honed and kept sharp.  And it is worth the effort.  You can achieve the promises that trading offers, but you have to be willing to re-work the mind you bring to the challenge.  That is why few people learn how to trade successfully.  They refuse to accept they have to change at a core level. 

The very glue that holds the adaptation of Uncertainty and fear together in reactive patterning has to be changed.  Then it has to be remolded so that the body and mind turn toward Uncertainty and risk with new eyes. That is the ultimate challenge to move the default programming from a bias of self-preservation in the short term to a probability based mind that has a long term focus for success.  This is the difference between traders who know the knowledge of trading, but cannot maintain their mind during performance and the traders who have found the “secret” to successful trading. 

The markets and the trading gods do not care.  Only you can make this difference happen.  As you can see in this cursory description of the Traders State of Mind process, it is not magic.  Change is a process where the very biological foundations of fear and Uncertainty have to be re-organized.  It takes time and effort (and no magic or specialized knowledge) to change how the brain and mind perceive the challenges of Uncertainty and risk.  You have to decide if you really want to become a trader or if you will continue to want to buy into the myth of the illusion of control.

The key is to learn to control what you really can control.  It was never outcome, no matter how hard you try or no matter how much you believe in mind over matter.  You have control over the mind you bring to the performance of execution – that’s all.  But with that knowledge and skill, you discover that your focus is no longer on winning.  It is on performance.  And you can learn to control the mind you bring to performance.  This is the elusive edge that can be taught.