Mastering Trading Psychology

Articles on Trading Psychology by Rande Howell, Trader Psychologist

Getting Past Your Invisible Wall of Resistance: 

Establishing a Disciplined Impartial Mindset

            “I see the potential, but I keep hitting an invisible wall.  My trading mind is in good shape one minute and then, out of nowhere, a switch goes off.  I don’t see it coming. That’s where I keep falling apart – I even see it happening right in front of my eyes.  It’s like I’m a spectator and I am paralyzed from doing anything.  My impartial trading mind flies out the window, along with my trading rules.  When the dust settles and I can see clearly again, I see that I lost control again.  I keep trying to stay impartial, but I keep losing that battle.  It’s frustrating because I’m trying hard, and I’m so close. That invisible wall is what keeps me stuck where I am as a trader.  If I could get past it, it would make all the difference in the world.”

Why Do You Keep Hitting a Psychological Wall Despite Your Best Intentions?

     Traders try hard, and then even harder, to achieve disciplined impartiality in their trading.  This is an emotional and psychological mindset where fear and eagerness to act are not present in the trading psychology of the trader while he is in the act of live trading.  To achieve this mindset, traders try to develop nerves of steel where emotion (in theory) is not allowed in the mind and where their trading mind has the patience of an ambush predator.  They become emotionally tough.  Yet the harder the trader tries to achieve this elusive mindset, the invisible wall is still there thwarting their best efforts.  Emotions still break through into the mind of the trader.  The disciplined impartiality that the trader is trying to achieve falls apart when the mind is hijacked by emotion.  Defeat is snatched from the jaws of victory again, again, and again.

     This scenario is played out every day by nearly every trader who has not learned how to develop his emotional nature and psychology specifically for trading.  What understanding, knowledge, and skill is missing in the vast majority of traders that keeps them stuck at “the Wall” despite their motivation to win and become a consistently profitable trader?  The answer starts with the lack of awareness of how the brain operates when stressed and the quality of mind that emerges from that brain challenged by the uncertainty and risk that the brain experiences.  This is huge.  What you do not know about the brain and mind experiencing the stress of trading will hurt you.  Just check your trading account for confirmation.  That blindness to understanding the relationship between the brain and mind is at the core of why you keep hitting “the Wall” in your trading.

     It’s not about trying harder.  Plenty of traders have already proven that trying harder, by itself, is not going to work.  If trying hard and being persistent were the answer, traders would be awash in money – but they are not.  What is required is waking up to a very different world.  Probably the hardest task a trader will ever do is to have the epiphany that the brain and the mind are one unit.  The mind that you bring to trading emerges from the brain.  It is not separate.  Rather, the mind is part of the potential of the human brain - AND THAT POTENTIAL IS SHAPED BY EMOTIONAL LEARNING.  Every time you have expectations of what will happen in a trade, you are experiencing the historical emotional learning that shapes the engaging mind.  Every time you experience fear, you are in a limbic memory that swallows the moment in which you live.  Every time you feel the urge to act impulsively (you guessed it), you are experiencing a limbic memory and learning that creates the mind with which you engage uncertainty and risk.  Every time, no exceptions.

     There is no mind “out there” that is separate from the biology of the brain and, in particular, the survival instincts of the limbic system (the emotional brain) of the adaptive organ called your brain.  If you are listening carefully to what I am saying here, you hopefully are waking up to a very different way of understanding your trading psychology.  In this new way of understanding, your biology, your brain, your emotions, your perception, and your thinking (acting as one unit) are all interconnected every time you look at a chart and make a trading decision.  And your brain has a different agenda than you (as long as you are in misalignment with survival purpose) which, for the struggling or stuck trader, occurs most of the time you are risking capital with an uncertain outcome.

     Go back and carefully read the vignette in the beginning about the trader hitting his Invisible Wall WITH THIS NEW UNDERSTANDING OF THE INTERCONNECTION BETWEEN BIOLOGY, BRAIN, EMOTION, AND MIND.   The trader is thinking that the problem in his trading is in his mind.  But the mind is a creation of the brain with a heavy dose of the limbic system (aka emotion) influencing the perception of his mind.  He never saw the emotional hijacking coming because he did not have the eyes to see the profound influence that the emotional brain (limbic system) has on what he “sees”, much less on what he is instinctively reacts to.  The limbic system sees threat to life in any uncertainty while the thinking brain (seeing through the eyes of logic) sees opportunity in uncertainty.  And what he does not know about his emotional brain is, in fact, hurting his capacity to become the trader he could be.  How about you?

The Impact of the Agenda of the Emotional Brain on Your Trading 

First, you do not have a brain – your brain has you. “You” are separate from the brain; “you” are a creation of your brain.   And what exactly is this brain doing while you trade?  In essence, it is headquarters for adapting you to survive in the world to which you are born and live.   It literally creates a virtual representation of the world (of reality) based on its default biases, emotional learning, and experience. 

You do not see, then believe.  Instead you believe, then see your perception of reality from those beliefs.  This is a critical distinction.  So you are never seeing and experiencing the reality you believe you see.  Instead, you perceive a story that the brain has made up that explains all the “stuff” going on in your world.  That is exactly what your rationalizing thinking brain does – it creates stories or narratives that make sense of the world in which you live.  The question is not whether that story is true or not.  The question for you is whether this invented story is effective at extracting capital from the markets or not.

The prime directive of the brain (and in particular the emotional brain) is to produce a story line that allows you to survive in the short term at all costs.  It has no interest in long term benefit.  For the emotional brain evolved in a time and place where staying alive was a big challenge.  The world of our caveman ancestors was a dangerous place and there was no such thing as psychological discomfort.  All threat was a threat to biological existence.  The thinking brain that pondered future possibilities did not develop until much later.  Everything was focused on short term survival.  Therefore the brain adapted our ancestors for short term survival in the face of biological threat and this developed into our default programming.  Out of this prime directive came the fight/flight response to threat.  This bias is alive and well in your trading performances today – lurking behind the radar of your thinking mind.

You experience this very successful adaption for short term survival (but not for trading) every time your fear holds you back from entering a trade (“what if I lose?”) or exiting (“it may turn around and save me from losing”) trades.   You also experience the emotional brain’s survival instincts taking over the rational thinking brain every time you jump into trades (urgency to chase prey) or revenge trade (beat the danger of loss into submission).  The problem is that the lions, tigers, and bears that the super-fast, short term survival emotional brain was built to protect us from no longer exist in the modern world (or in the trading world).  This is the problem that has to be solved for you to get past the invisible wall that holds you back in trading.  Your emotional brain thinks you are back in a dangerous world and it is far more power than the light-weight thinking brain you ask to trade under the pressure of uncertainty.

But that is not all.  Your brain is also built to control outcome, predict outcome, and to be right.  And it hates, hates, hates uncertainty.  It will do anything to avoid the perception of uncertainty and its link to vulnerability (there is that threat stuff again) and the fight/flight response.  If you set out to find the very worst scenario to expose the emotional brain to (with all its biases built around short term survival instincts), you could not have created a tougher situation to expose your brain to than in trading.  In trading, you have no control over outcome.  That is a scary predicament for the emotional brain.  And successful traders have to give up the illusion of control to bridge the gap between inconsistency and consistent profitability.   Your emotional brain, your caveman brain, may have done a great job until it got to trading.  Now its strengths become your weaknesses as a trader.  That has to change if you are going to move to the next level as a trader.

Developing Your Potential as a Trader

You have now heard the bad news.  But there is good news if you have the internal courage and fortitude to redesign the brain and mind that trades.  It is not magic.  It is done through coming to a very new understanding of the way brain, emotion, and mind work together.  It requires learning how to regulate emotions before they take over your mind.  It also requires that the emotional learning of your limbic system be updated from its default programming (that is what you brought to your trading performance) into a brain and mind that is trained to operate in an environment of uncertainty (with associated risk) from a mind rooted in disciplined impartiality.

If it were easy to do, everybody would be doing it and there would be many more successful traders than there are.  The vast majority of traders will chase trading success blindly, never understanding the world they have stumbled upon.  The skills needed are emotional regulation, mindfulness, mastering your fears, and developing aspects of your brain and mind that remain untapped.  These are not present from most traders, except for the courageous few who are willing to face their fears – and master them rather than conquer them.  And those traders are willing to step out of their comfort zones and intentionally change the way they engage uncertainty. 

Instead of trying to control the outcome of external events, they recognize that real power is nurtured by mastering the self that engages uncertainty – the very thing that your emotional brain does not want to do.  Until you realize the power of the emotional brain over the thinking brain, the invisible wall will hold back your greatest efforts.  You have to work the emotional brain in order to create the thinking required to manage uncertainty.  That emotional brain has to become comfortable with uncertainty and not knowing.  This is where you realize that you never had control over outcome.  But you do control the mind that you bring to the management of uncertainty.  It is the psychological edge you develop by mastering your emotional brain that runs the thinking brain’s perception.  This is the key to the door in the invisible wall.