Articles on Trader Psychology by Rande Howell, Trader Psychologist

Mastering Trader Psychology

Do you Want to be Right or Be Effective? 

From Self-Sabotage to Humble Confidence

Are You Ready to Make the Necessary Changes?

A trader’s quest for consistent profitability predictably comes to a fork in the road. There comes a moment when you realize you have been running into a brick wall in your pursuit of trading success. Knowledge and performance do not match up.  Most likely, you know “how to trade” in theory.  You can win in simulation.  By all appearances, you know trading – you can talk the talk of trading.  People respect your knowledge – even seek you out.  It feels good to have the respect of your peers – almost believing your knowledge does mean success.

But there is that profitability gap stridently staring you in the face.  There is a persistent gap between performance and knowledge in your live trading with capital at risk.  Your trading account keeps busting you from your idea of yourself as a successful trader.  Something is wrong, but you cannot see it.  It is what you do with this fork in the road that makes all the difference in the world.  Everybody has either been there or is approaching this moment in their trading evolution.  All want to succeed, but few are willing to make the changes that allow a shift from their current mindset to the mindset required for effective trading.

The truth is that neither your brain nor your mind was built for trading.  And if you don’t change the brain from which your mind emerges, you will not make it in trading.  It’s not that something is wrong with your brain/mind.  It is just that it is built for very different purposes than the mind required for trading effectiveness. And the brain, with its mandate for self-preservation, does not want to change what has historically been successful for short term survival.  And therein lays the problem with wanting to be right versus wanting to be effective.

Your brain was built for short term survival, and the mind that emerges from your brain follows the survival instincts locked into your DNA.  It is mandated to attempt to control outcome and predict what is going to happen.  Good for short term survival – bad for the long term mind needed for probability management.  As long as you don’t change the brain that trades, you stay stuck in self-limiting patterns – no matter how brilliant or knowledgeable your mind is.  Until you learn how to change the tendencies of your genetic predisposition, your mind follows the dictates of the survival instincts of the brain – even if you are human.

But Why Can’t I Detect This Happening to Me?

This does not sound logical at first.  The problem is that the rational mind simply covers up the driving forces of what really motivates the brain. You are not aware of most of what the brain is doing underneath the surface of the mind.  One of the major things that the brain does to manage all the information it has to process is to push all familiar patterns into the background where they become automatic.  Once the brain finds a successful solution to a problem and it becomes familiar, it is simply pushed into the background – outside of conscious thought. Otherwise there would be so much clutter in the mind that there would not be enough processing speed to manage all the stuff the brain has to do to survive.  You are not aware of the automatic, reactive (instantaneous) solutions to problems that the brain/mind encounters when it engages uncertainty.  Before thinking has occurred, the brain has already made the decision.  The rational mind only makes up alibis for what the survival instructs of the emotional mind has already decided.  This is a serious problem in trading.

Let me give you an example.  A trader complains that the fear of missing out is causing him to jump into trades BEFORE he checks for the confirmations required by his trading rules.  He tries hard to stop this problem from occurring by willpower and by working hard.  But the harder he tries, the more persistent he acts impulsively at trade entry at exactly the wrong time.  The more he pushes against the pattern, the more the pattern persists.  It does not make logical sense as long as you hold onto the assumption that you are actually a rational being, where logic trumps emotion.  The truth is that the trader has triggered an old emotional survival pattern that simply has been hijacking the trading mind.  He doesn’t know how to stop the problem because he does not understand the problem from an emotional motivation standpoint (despite the trained engineer that he is).

When analyzed carefully, we discover that the problem impulse only becomes evident to him after one or two valid set-ups have passed without his acting on them.  But it was the very first missed opportunity that set up the pattern rooted in this fear of missing out.  In slowing down his thought process through emotional regulation and mindfulness, he discovered the cue to the reactive pattern launch.  Once he missed the entry opportunity (it develops fast and you have to be in a state of readiness), he wished that he hadn’t missed the opportunity.  And then he holds on to that emotionally charged thought and it grows into “better not miss the next one”.  As many reactive patterns go, this one was forged in another time and place.  He got few opportunities to prove himself while growing up and learned that he had to never miss an opportunity in order to show that he mattered.

The genesis of the problem reactivity resulted because his brain learned an effective short term solution to his concern of proving his inherent value – and that solution (being successful) got locked into familiar pattern.  And, because it became a familiar pattern, it was pushed into the background of all the other stuff the brain/mind was doing.  Out of sight, out of mind.  It became an automatic response to anytime he experienced the fear of missing out.  Now the pattern is so dug in that it appears almost like a personality trait. It worked well academically, in athletics, and even in his career – until trading.

Now that emotionally driven pattern (that had helped him achieve in many areas of his life) was an obstacle to his growth as a trader.  The familiar (and unconscious) pattern was now the source of his impulsive decision making in trading.  Once it had been right.  Now it has become destructive and causes him to have ineffective performances in the moments of managing uncertainty.  How could something that had been so RIGHT have turned into something so wrong?  Controlling outcomes appeared under his control through this personality pattern until he started trading.  In trading, controlling outcome is only a dangerous illusion.  Different worlds.  Different rules.  Do you insist on being right – or do you open yourself to learning how to become effective in a different world?  This is the question that is the fork in the road.

How Do You Change What You Cannot See?

Fortunately your brain is very adaptable.  And with effective intervention, it can be re-trained from the reactivity patterns deeply rooted in its survival instincts to a brain that gives rise to an intentional mind built for managing uncertainty and probability.  The key is that you have to become an active participant in the re-development of the way your mind engages uncertainty.  You cannot be scared of change – you have to become its champion.  The very first step is to give up the notion that you can control or predict outcome – the very foundation upon which your caveman brain is built.

It is this caveman trait to reactively control or predict outcome that is at the center of the problem with your performances in trading.  No matter how hard you push, no matter how much you positively visualize winning, and/or no matter how much stuff you throw at better prediction models – the uncertainty of trading refuses to be tamed.  Acknowledging that and closing it down as a possibility opens up another possibility for your trading mind – controlling the mind that engages the inherent uncertainty and risk of trading.  By mastering the emotions that give rise to the mind, a whole new world emerges.  It is a world that focuses on performance and process rather than controlling outcome or prediction.  As long as you are trying to control what cannot be controlled, you will be exposing the brain and mind to learned helplessness.  Force of will or denial of feelings simply entrenches emotional reactivity deeper into automatic pattern.

But through emotional regulation training, you can learn to slow down the intensity of an emerging emotion.  It does not have to hijack your trading mind.  It may be uncomfortable facing the uncertainty and risk of a trading decision, but the experience does not have to overwhelm your thinking mind.  This is the first stage of emotional intelligence development.  To master an emotion, you have to first regulate it so that you can learn from it.  Fear, anger, revenge, and over-confidence have much to teach if you, the observer, is willing to listen and make the necessary changes.  Emotional regulation is not the cure, but it does put you in a position of being able to learn what is behind the emotion.

Mindfulness:  Learning to See What is Behind the Emotion

Developing the skill of Mindfulness is essential to the development of the trading mind.  You have to develop the inner eyes to see what you have pushed out of working awareness so that you can deal with it effectively.  Mindfulness awakens a phenomenon called the Observing Self.  This is when you recognize that you and your thoughts are not one and the same.  There is always a separation between thoughts that run through the mind and the inherent awareness that observes thought running through the mind.

It is in developing this human talent into a skill that allows you to change the way you respond to uncertainty and not the way you believe you should – big difference.  You come with a genetic predisposition to associate uncertainty with danger and a fight/flight response. But that is only a historical adaptation.  It does not have to be that way.  Through emotional regulation and observation you can change the emotions that are triggered when you encounter uncertainty.    

It is here that the mindful trader begins to recognize that he or she can become the designer of the Self that engages uncertainty.  Rather than staying stuck with what you inherited from history, you can train the adaptable brain into learning to respond emotionally to uncertainty far differently than the historical default programming of Uncertainty → Confusion → Vulnerability → Fight/Flight.  This is the emotional wiring that is so troublesome for traders as they try to maintain a rational mind when trying to make decisions under the conditions of uncertainty and capital risk.   The vulnerability is going to trigger an emotional response.  The default emotional programming is the problem.  Fight/Flight leads to fear and impulse responses that shut down thinking at the very time you need to have your wits about you.

The vulnerability of being wrong or the exhilaration of being right will always be present when engaging uncertainty.  That is just how challenges and emotions work. However, with training, the emotion triggered by the uncertainty can become disciplined impartiality where you are patient, yet focused, ready, and alert – perfect for managing the challenges of uncertainty.  By design, you have changed the association between emotion and uncertainty.  The historical default adaptation is from uncertainty to fight/flight.  With emotional skills development that can be changed.  Uncertainty can be trained to evoke disciplined impartiality. 

This is the goal of applied mindfulness.  By observing non-judgmentally you realize that you are not stuck in a particular organization (adaptation) of the Self.  There is no judgment (condemnation) of yourself; there is only recognition that a particular organization of the Self is either working or not working effectively to extract capital out of the markets.  The brain is free to re-adapt itself to higher functioning.  It is only your competence to manage the mind that trade; something that can be improved, rather than a tragic flaw you really do not want to acknowledge.  Mistakes becomes the spring board to learning and reorganizing the self, and not a reflection of your value as a human being.  This is a powerful shift.

Applied mindfulness is a powerful tool when you learn how to use it.  It helps you to escape the tyranny of self-judgment, and, instead, start using emotions to build the mind that trades – and to learn much about yourself in the process.  It really does come down to letting go of the need to be right (which is an impossible task in trading) and embracing the notion of emotional intelligence.  In emotional intelligence you are looking to learn about how to use emotions to construct a more effective Self that engages uncertainty (and not to be right or wrong).  It is here that your psychological edge is born.  The key is a decision on your part that you want to become more effective (in terms of your trading account) rather than the position of having to be right (an ineffective psychology of trading).  Right or effective – it’s your choice.