Mastering Trader Psychology

Articles on Trading Psychology by Rande Howell, Trader Psychologist

Mastering Self-Doubt:   Knowing What to Do And DOING It

“It’s Deja-vu All Over Again” Yogi Berra

    Opportunity knocks.  You’ve been waiting for it.  The setup is taking shape and it’s looking good.  All you have to do is do what you know you need to do.  It’s simple really.   It’s the moment of decision that you know all too well when putting capital at risk. You know what to do, but you can’t do it.  Instead you freeze.  Time stands still as self-doubt seizes your mind – “What if you’re wrong?  What if you lose?  What if you’re not right?”  The debate inside your head rages.  You feel the fear bubble up.  Heart pounding, you watch yourself hesitate.  Meanwhile, you hear yourself scream, “Just do what you know to do – just do it!”  But that voice gets drowned out by the growing wave of self-doubt. Then the opportunity is gone. 

    At first, there is a moment of relief – the struggle is over.  It feels good that the drama has passed.  After all, you could have lost money, but you didn’t.  Then, as your rational mind comes back on line, you realize that you have let another perfectly good set up pass you by again.  Now it’s not self-doubt or momentary relief that fills your mind.  No, it is self-recrimination and frustration that fills up the self-talk in your head – “What’s wrong with you; why can’t you just do what you know to do?  Why?  Why?  Why?”        

Entry is not the Only Place Self-Doubt Raises Its Ugly Head

    Though entry problems are a common area for hesitation and self-doubt to occur, there are numerous other places in the process of managing trades that the trading mind is easily hijacked by self-doubt as the trader is experiencing the uncertainty of probability when capital is at risk.  Getting caught in a side-ways trade will do the same thing.  Another place where self-doubt, hesitation, freezing, and fear of loss become magnified and take over the trading mind is when a trade goes against you.  More seasoned traders discover that taking profits early, in a spasm of self-doubt, is the largest hurdle between them and getting to the next level in their trading. 

    In all these situations, self-doubt appears as an internal struggle in the trading mind, where knowing what to do is stripped away from BEING able to act on your knowledge.  But why is self-doubt such a big problem?  Many traders come from backgrounds where they were self-confident.  They were confident that could manipulate the conditions of their environment for achieving success.  How can such a confident mind devolve (in such a short period of time) into self-doubt that compromises your trading results?

The Biology of Self-Doubt

    Your brain is a major problem when it comes to trading and active investing.  It is not built to entertain uncertainty, randomness, ambiguity, and probability.  In fact, it evolved to avoid these conditions because they were associated with biological threat.  Anything uncertain in our ancestors’ environment was considered dangerous and to be avoided.  Instead, your human brain evolved to seek short term solutions to survival threats.  Your ancestors just wanted to live another day by avoiding threat IN THE MOMENT.  This strategy worked – short term success trumped long term success.  So avoidance of uncertainty was opted in by natural selection so that it became a trait that was passed on to future generations.  This bias toward short term survival over long term benefit became the survival instincts of the emotional brain long before you showed up.  You just inherited what had proven successful for survival in another time and place.  And now it shows up in your trading mind today. 

   Now add one other factor to this biological priming for choosing short term survival over long term benefit.  All thinking is emotional state dependent.  You never think without the influence of emotion – ever.  In fact, what you call thinking is simply the thinking brain (the neo-cortex) creating explanations (many times simply alibis) for what the emotional brain has already decided.  So, even though thinking and logic may appear to be independent from emotion, it is an illusion that will get every trader in trouble.  This discovery has led to the invention of the relatively new field of emotional economics.  For many years economics assumed that humans acted rationally in an economy, but the evidence of decision making did not support that assumption.  Economics now assume that humans act irrationally in the economy, rather than rationally.

    The same with consumer marketing.  Consumers rarely make rational decisions.  They make emotional decisions that they then rationalize to appear as though they are rational.  As an example take a look at all the guys who purchase really expensive heavy duty pick-up trucks that are built for serious work and which they can barely afford.  Then they drive around in them (looking very manly) while the trucks rarely are used for the work for which they were created.  It’s all testosterone without an ounce of reason.  It allows a couch potato male to FEEL manly without having to actually BE manly.  The feeling of an emotion trumps thinking every time.   Humans are rationalizing animals, not rational animals.  And this is exactly what you are experiencing with self-doubt where you have the knowledge to do what needs to be done, but you cannot act on it under the pressure presented by uncertainty with capital at risk.

      How does this apply to self-doubt in trading?  Underneath all the logic to get into a trade for the probability of long term gain is an instinctual and primitive uncertainty monster that has a completely different agenda – it wants to FEEL safe in the moment when exposed to challenging circumstances.  That need for feeling safe is being undermined by the instinctual fear of the uncertainty you are attempting to expose it to.  From the Emotional Brain’s perspective, “You”, the trader, are exposing it to a biological threat that it MUST stop you from doing.  It has an imperative to stop the thinking brain (that’s you trying to trade and make decisions for your long term best interest) EVEN IF THAT INCLUDES HIJACKING THE THINKING BRAIN.
  
    Now to trading.  When you are in the mental confusion of “knowing what to do, but not being about to do it”, you are experiencing your evolutionary biology short circuiting your capacity to think.  The emotional brain’s bias is short term survival.  If you do not get into the trade and risk capital (biological threat), you have avoided the threat and thereby won the survival test.  Long term survival options do not enter the picture.  The emotional brain’s only consideration is short term survival.  And you not getting in the trade in the first place is a victory.  You will experience that victory by feeling a momentary sense of relief from the squirt of dopamine that your emotional brain provided you for reward. 

    If you hesitate or fall into confusion as you trade and risk capital, this scenario is being played out on a continuous loop.  AND IT IS HAPPENING BENEATH THE THRESHOLD OF YOUR AWARENESS – you do not even know it is happening.  It is the pattern that the emotional brain has locked in for your short term survival and it simply plows the thinking brain out of the way – hence your hesitation, freezing, and confusion.  No amount of willpower or positive thinking will get it to stand down.  But if you learn how to regulate emotions and create a new mind that engages the moment of uncertainty, you can rewire what nature has adapted you for.  Before that, let’s now look at the psychology of the trading mind that engages the uncertainty of risking capital where outcome is not controllable.

The Psychology of Self-Doubt

    For short term survival’s sake, your inherited biology does not want you in the trade in the first place.  It would rather FEEL safe in the short term even if it is sacrificing long term advantage.  Hesitating, freezing, or getting confused is a simply a means to affect your thinking brain’s performance.  The effect is that you know what to do, but you cannot do it.  It’s like there is a disconnect between your knowledge of trading and your capacity to use that knowledge effectively when the money counts.  That “no man’s land” is where emotion and belief intersect. 

    These particular beliefs alluded to are not the ones you say you have when in a sound mind, but they are the beliefs you hold about your capacity to manage uncertainty while in performance (or life threatening) stress.  Remember, we are not talking about thinking here.  Thinking (your thoughts) occurs long after emotion and beliefs have set the stage for engaging uncertainty.  Instead we are talking about beliefs as learned assumptions that drive emotional reactions and your engagement with the environment of the markets.  And the result of these beliefs in action will be found in the health of your trading account – and not the story (or narrative) you tell about the beliefs that drive performance under pressure.  This is an important distinction which few traders appreciate.

    In the gospel according to the Emotional Brain, your fear of loss is tied to your belief that you (as a living organism) cannot manage the potentially life threatening encounter with uncertainty – otherwise known as the fear of death.  The belief that you might not be able to manage the encounter with a dangerous situation elicits the psychology of the fear of loss.  And out of the activation of that fear comes the avoidance of the encounter.  You experience that avoidance by freezing (not doing what you know you need to do when you need to do it), hesitation (cannot make a decision), and/or confusion (paralyzed thinking).  To the Emotional Brain, you are experiencing the fear of potential death and instinctually finding a way of backing out of a dangerous situation BEFORE THE THREAT IS REALIZED. 

    That fear of loss may be expressed in a different way.  You may experience the need not to lose, the need to win, the need to be right, or the need to predict outcome.  In effect, it is about the brain’s need to control outcome.  Your beliefs that you project onto the markets are all about controlling outcome or predicting outcome.  The various fears of trading come from NOT being able to produce this mandate of your survival brain. 

    This is the great problem in learning how to be successful in trading.  The very brain you brought to trading that is mandated by its survival instincts to control outcome (and whose psychology is built around this assumption) encounters a world in trading where it is rendered useless.  It experiences powerlessness in the face of continual uncertainty.  And the emotional brain is much faster than the thinking brain.  It is like bringing an army equipped with slingshots, spears, and bows to fight a modern army equipped with the latest weaponry. The emotional brain, with its beliefs about power and control, is rendered ineffective when confronted by the inherent randomness and uncertainty of the markets.  A very new mind and beliefs are needed.

Getting the Mind Right for Trading

    Fortunately the emotional brain’s reaction to uncertainty can be retrained.  The very first step is letting go of the illusion of control. That’s a scary thought to the emotional brain, so you first have to calm the excitatory responses of emotions to encounters with uncertainty.  This is called emotional regulation.  Here, you are no longer denying or pushing emotions away.  Instead you are learning how to manage the intensity of the emotion so that it does not activate the fight/flight response.  This way, thinking can be kept on line even as you feel emotions of fear, greed, or anger.

     But that is never enough.  Calming emotions can get you to the door of the mind and here the skill of mindfulness needs to be developed so that you can look into your mind and find the beliefs that drive your performances.  The old beliefs, developed by the emotional brain long before the thinking brain came online, have to be deconstructed.  You do not simply replace beliefs like an interchangeable part.  The very neural circuitry of your beliefs literally has to be deconstructed and a new belief habituated (again, not replaced).  This takes effort and training.

    The new beliefs being fostered are not rooted in the need to control or predict outcome.  Instead they are rooted in your capacity to perform in the face of uncertainty.  This is a very new brain and mind than the one you brought with you to trading.  The new assumption about winning is not about outcome, which you cannot control no matter how hard you try.  It is about what you can control – your performance.  It is about the calm, disciplined, and impartial mind that engages the uncertainty rather than the caveman brain you brought to trading.  It is not trying to control outcome.  It is maintaining the mind that engages uncertainty.  This is the new psychology of winning in trading.