​Mastering Trading Psychology

Real Discipline that Maintains Order Under Pressure

 External Discipline vs. Internal Discipline

                   “I have all the outward signs of discipline.  I have rules and I know when I should

                    apply them.  The problem is that, in the heat of the moment, my rules fly out of

                    my mind and I end up doing exactly what I was trying not to do by creating

                    and trading from the rules. I can plan my trade, but I haven’t learned how to trade

                    my plan.  What am I missing?”

     Just about every trader has experienced the collapse of their discipline when the going gets tough.  But what is really happening when the carefully laid plans for trade management of a trader are suddenly yanked out from underneath him?  He is trained to plan the trade and trade the plan.  But, what seems so simple in principle gets dicey in the actual “doing”.  How can a trader better understand how the discipline he is striving to achieve and maintain, in the roller coaster ride of a trade, gets ambushed just when he needs it most?

     First, external discipline is represented by all the rules you create that you should follow when you are experiencing the confusion that accompanies making decisions under the pressure of uncertainty.  In theory, will remain rational while trading by “following the rules” when you feel pulled by strong emotions.   The problem is that the logical rules, so carefully crafted when in a rational state of mind, are hijacked by much more primitive survival rules.  These survival rules are emotional circuits that are biased towards short term survival, and are not the long term probability rules needed for successful trade management. 

      Most traders, after failure of their external rules when tested by uncertainty, will form even more intricate rules to cover the latest round of glitches found in their performance.  This exercise becomes a pattern that continues to fail, but it is what traders are taught as a left brain biased strategy based on their belief in external discipline by rules rather than internal discipline from core emotions.  It is what they know.  By ignoring the impact of emotions on thinking, logic is simply ambushed when outcome cannot be controlled.

      Internal discipline is the capacity to maintain emotional order in the midst of challenge AND turn toward the discomfort and vulnerability experienced when encountering uncertainty and risk.  It is this “turning toward” the discomfort that moves beyond trying to control the uncertainty and learning how to manage the internal experience of uncertainty.  Internal discipline relies upon the capacity to manage order emotionally while under pressure – not by man-made rules.  Until the trader can do this, external rules are a house of cards.  The discipline looks good in theory but falls apart when tested by the challenges of managing uncertainty.

     Internal discipline, unlike external discipline, counters the biological and psychological bias to avoid the fear of the unknown and the acute vulnerability triggered by this fear.  This fear of the unknown that is triggered by engaging uncertainty where outcome cannot be controlled or forced must be turned towards. This is the advantage that internal discipline gives the trader over reliance on external discipline.  External discipline when coupled with internal discipline gives the trader the capacity to codify a disciplined state of mind.  This is where left brain logic and right brain emotional intelligence give the trader a powerful tool to maintain his sanity when managing the slippery uncertainty found in trading.

     Fortunately, internal discipline can be learned.  Most traders do not come by internal discipline naturally simply because adaptive pressure selected it out while building the historical self during the formative period of your brain’s development into a working mind.  Consequently, many years later, the capacity to turn toward (approach) the psychological discomfort experienced in engaging uncertainty does not come naturally to the trader and can be found to be quite challenging. 

     There is nothing wrong with external discipline.  Most have found its application outside of managing risk in the moment to be quite useful.  It is when under stress that successful primitive patterns (that have proven successful for short term survival) will always trigger to the forefront and take over response to uncertainty despite your best intention to maintain external control.

Emotional Control First, Rules Second

     Reliance upon rational rules fails because, when a trader is experiencing stress, his brain is going to default to old primitive emotional patterns that were established much earlier and were successful in dealing with the threat of the unknown on a short-term survival basis.  As a trader continues to be exposed to the stress of not being able to control outcome, external discipline is worn down and finally collapses. 

     Traders experience this as an emotional hijacking that continues to happen time and again – even though the trader tells himself it will be different the next time.  The problem is that the trader continues to use the same old ways and skills, but tries harder to use them by exerting more willpower.  Unfortunately, the old primitive emotional patterns trump willpower nearly every time.   

     An untrained mind, when it experiences uncertainty and ambiguity, will trigger to confusion.  And the moment the brain experiences confusion, fear arises.  To the untrained trading mind, this is the point where the rational rules of external discipline are hijacked.  The brain will not tolerate confusion.  It is biased to trigger to fear as a way of avoiding a threatening situation in the short-term – the long-term is simply not a consideration to the emotional brain.  It is this hairpin trigger that has to be deconstructed so that a new association between the confusion of not knowing and the triggering of emotion can be developed.

     Even worse, the brain becomes conditioned to trigger to the old survival patterns faster and faster due to the continued failure of the external discipline and the development of hyper-vigilance anticipating the future.  This is the repeating pattern that the trader, unwittingly, continues to strengthen by always using external discipline as the method to maintain order under pressure.  Then, the emotional program triggers even faster and generalizes so that if starts getting activated even faster and sooner when approaching uncertainty and the inherent fear of the unknown.  Getting out of the perceived threat fast is the primitive priority, not managing probability for your long-term benefit.

     But by turning toward the discomfort and learning to regulate the emotional intensity of the triggering of emotional avoidance patterns, the trader begins the quest to develop internal discipline as a way of maintaining emotional order in the face of uncertainty and the consequent fear of the unknown.  (For further information about developing emotional regulation skills please see my previous articles on that topic on my website.)

Turning Toward the Discomfort  

     So what happens when you volitionally turn toward the discomfort?  In emotional state management, you learn to sit with the discomfort rather than react to it.  This takes training and practice, but it is a skill set that is required to establish emotional discipline in the face of uncertainty.  In learning to sit with the discomfort patiently, you and your brain become partners of sorts.  You are showing the reactive, emotional brain the difference between biological threat in the short-term and psychological discomfort while managing probability for long-term gain.

     The fear circuits of the emotional brain then calm down and order is re-established.  Suddenly those rules can be applied in this new emotional soup.  The amygdala (ground zero for the triggering of fear programs) is cooled down and can learn to trust higher brain function.  It can learn to be less hyper-vigilantbecause it has experienced the rational mind working in concert with it for the overall good of the trader as a biological organism.

     The emotional brain is all about short-term survival.  Until it learns that it can sit with psychological discomfort and survive, it interprets all encounters with uncertainty, ambiguity, and confusion as threats to its immediate existence.  By learning to sit with your discomfort mindfully, you retrain the association between biological threat and confusion experienced in managing uncertainty and probability.

     This is the start of developing a new mind built for trading.  It takes a while to develop.  But it is a far better solution than to continue to rely on methods that do not work.  The emotional brain has to become your partner, not the thorn in your side.  The rules of the left brain become led by the strength of your emotional discipline.  This is when the trader can plan his trade and trade his plan. 

Articles on Trader Psychology by Rande Howell, Trader Psychologist​