​Mastering Trading Psychology

Forging a Disciplined, Patient Mind for Dealing with the Uncertainties of Trading

The Mind You Bring to Trading Is Not the Mind that Will Bring Success in Trading

Steve’s problem is a very common problem in trading.  The journey into trading is littered with the casualties of technically smart people who see that a major key to success in trading is the very rational thinking that comes so easy to them.  It seems like a no-brainer until they attempt to use their gift of rational thinking in the emotionally explosive world of uncertainty found in trading.  And it is not the size of the risk that triggers self-doubt and fear of loss.  Many traders with strong logical capacity falter even under small levels of capital risk.

What’s the problem?  Clearly it is not the capacity to think logically.  Steve had a proven track record of success solving daunting problems.  There was even a sense of reverence about his ability to solve problems logically. So what went wrong?

Go back and study that vignette about Steve’s rise and fall in the company where he worked before trading.  The common problem pattern is evident there.  Notice that his technical acumen is noticed and praised there.  He was able to solve problems through his individual effort and the gift of his talent for logical thinking.  And based on his track record of success, he was promoted into management.  This is where he hit his wall.

The very mind that was so gifted at solving technical problems on an individual basis through sheer brilliance was not prepared for the new set of skills required to work with fallible human beings to produce effective action on a group level.  AND THOSE CAPACITIES WERE NOT DEVELOPED BY MENTORSHIP AS PART OF THE TRANSITION FROM THE TECHNICAL SIDE OF THE BUSINESS TO THE MANAGEMENT SIDE.

Left to his own devices, Steve did the best he could.  He fell back to working hard and pushing himself and everyone one around him.  But despite all that technical skill, he did not know how to emotionally connect with his colleagues and the teams he managed.  That was not part of his history, and it did not come natural to him.  It was a world that he did not really know existed; much less know to develop it.  And the company he worked for did not invest in him so that these interpersonal skills could be developed.

Instead, Steve became unhappy, blamed others because he knew no better, and later left the company looking to regain the edge he had lost.  And that landed him in full time trading where history was repeating itself.  The difference is that in trading there was no one to project blame onto.  Using the same strong logic skills that had served him well as a technical problem solver also pointed out that the problem in his trading was HIM. 

He still did not understand why emotions like fear of loss arose when he tried hard to keep emotions out.  He just keep watching as these emotions happened anyway and blew his logic out of the saddle regularly when he was risking capital in live trades.  What he was beginning to recognize is that the mind he brought to trading was not going to produce the success in trading that he knew was possible.  Applying logic to the problems of hesitation and early exits kept him mired in mediocrity.  No matter how successful his mind had been in the past, skills were missing that he needed in order to truly trade effectively.

Mastering the Skills Necessary for Trading Success

Steve is similar to a host of other traders that come from technical backgrounds.  Those professions include computer programmers, IT guys, accountants, engineers, air line pilots, most MDs, and more.  The very training and discipline required for success in each of these past professions becomes the obstacle to creating success in the new environment of trading.  Simply put, the skill sets for success are different.  Fortunately they can be learned.

Essentially the problem is the training that creates the need to be right and the motivation to control outcome.  Personally when I am flying as a passenger on an airplane, I want the pilot to be fixated on doing everything right.  The same with an engineer’s drive to make sure the bridge he or she is designing meets critical load bearing standards.  I also want my accountant to be right.  Those skills are drilled into the work ethos and become the habits that drive performance.  However, that black and white thinking, “got to be right” thinking – so desirable in one domain – becomes the problem in the environment of trading – where the trader has to give up control of outcome and of being right. 

But what do you gain by giving up the need to be right (or the need to not be wrong) and control over outcome?  First, you let go of something that cannot be controlled no matter how hard you try or how predictive your methodology is.  In doing that, you are no longer figuratively banging your head against a brick wall hoping the wall will crack before you do.

The biggest advantage you gain is the ability to turn your attention to controlling something that you can, in fact, control – the mind you bring into the moment of performance.  By giving up control of outcome as an illusion, you focus on your process rather than outcome.  This is where you begin developing the probability-based mind.  Instead of defining your worth by trying to control something that you cannot, your notion of winning is re-taught to focus on the quality of performance.  The mind is no longer scared of losing.  It is focused on the process of trading.  You regain a sense of control – over long-term probability instead of short-term winning.

This is the missing skill that most very bright rational traders need most.  In probability you are no longer focused on short-term gain.  Fortunately, this skill can be developed.  It requires a change in the process you use to approach uncertainty.  Emotions have to be regulated first.  Until this is done, emotional hijacking continues to happen regularly.  Then you have to learn how to step back out of the trains of thought that drive you to make short-term survival decisions over long-term probability.  Then discipline, courage, self-soothing, and impartiality have to be developed to replace the reactive mind that was programmed by default.

It comes down to a decision of whether you really are willing to become a successful trader.  Are you willing to change the way you interpret the unknown of uncertainty?  After proving to yourself that the mind you brought to trading is not going to work in bringing success, are you motivated to building a new mind for probability management?  This is the gap only you can bridge.  It will not happen by itself.  Your brain and psychology are totally against the development of the probability mind.  Only a motivated trader ready and willing to change is going to bridge that gap.  It is so easy to stay stuck and comfortable.  It requires mastery of self to change into the person needed to bring your dreams into reality.  That is the edge in trading. 

Numbers and logic had always come easy to Steve.  Throughout his career he was always the “go to” guy when technical problems confounded others.  Computer systems made sense to him.  That expertise had served him well, both in compensation and career advancement - until he hit a wall beyond his understanding.

He had been promoted from technical services to management where he oversaw projects rather than worked on them.  And he found managing people to be very different than handling technical problems individually.  While he had shown brilliance with the technical side of computer systems, working client-side and gaining cooperation among competing interests showed limitations in his capacity to do his new job.  What once was easy and natural was now falling apart.  Despite that “left brain know how” that had wowed people around him, he was now floundering.

And he had had enough.  He figured that this was a perfect time for him to pursue trading – a love he had been tinkering with for years on the side.  In his mind Steve would be back where he had talent – the technical grasp of trading.  It seemed logical until he tried to do it.  His emotions keep sabotaging his best laid plans.  He knew what to do until he tried to do it in the heat of trades.  All his knowledge, so dependable in the past, simply flew out the window when he risked capital on a trade.  It was crazy.  Steve would find himself falling apart over risking $50 – no big deal.  It was not the size of the risk.  It was risk itself that crippled his perfectly good, number-crunching, left brain. 

Suddenly, the recognition of the probability of “not winning” (not controlling outcome) had become an obstacle.  He could talk the talk of probability or say that no one trade mattered, but walking the walk of probability was proving to be a different matter.

​Articles on Trader Psychology by Rande Howell, Trader Psychologist