Articles on Trader Psychology by Rande Howell, Trader Psychologist

Mastering Trading Psychology

The Hidden Link Between Trading, Gambling, and

Your Financial Performance

 

            No one wants to talk about it.  Traders gamble while believing they are having purely “trader psychology” problems.  Surprised? Yet, it is hidden in plain view. There is a powerful link between a trader’s capacity to be consistently profitable and his being blind-sided by ancient survival mechanisms that pull the unsuspecting trading mind into gambling mode. Though it is not evident, and not discussed in traders’ training, many of the problems found in trading are consistent with problem gambling. 

            The same mechanisms that expose flaws in your trading performances are rooted in the set-up for gambler’s mind that is part of a human being’s survival instincts.  Sorting through this limbic mess and subconscious drives is essential in order to build the mind that can trade effectively in the strive to become consistently profitable.

            Are these trader psychology issues?  Certainly.  But FIRST they are deeply rooted in the human bias to gamble.  THEN they are framed as trader psychology issues.  At the root, though, traders (and many humans) are hijacked by ancient emotional brain biases (below conscious threshold) towards gambling.  And if you want to solve the performance problems in your trading, you are going to have to solve the bio-psychological drives associated with problem gambling. 

            These drives are inescapable.  You came by them honestly through short term survival adaptation and gene transmission…and then you found trading.  That brain of yours was not built for the needs of long-term probability, which trading requires.  The problem is that most of the triggering of problems in trading performance simply works below the threshold of your awareness.  You do not recognize that you are being hijacked by gambling impulses – because trading has a different language that disguises instinctual gambling mechanisms as “trader psychology’ issues.

            This is a problem you must solve.  It will not go away.  And it will deplete your account if you stay ignorant of the power between these links and mechanisms.  For they unknowingly bias the trader to fall into the trap of a gambler’s mind rooted in ancient survival strategies rather than the probability-based mind, that I call Traders State of Mind. 

There are no exceptions.  You are not just going to work through it like a TA problem.  These are programs that have been running in your emotional brain forever.  Casinos have been working this problem to their great advantage for decades.  Ignorance may be bliss, but it is also lethal.  Rather, the brain you inherited from your adaptive history wants fast action, and it wants not to lose, to be right, and to have control over the environment.  And, therein, lies the problem.  YOU ALREADY BELIEVE, ON A LIMBIC LEVEL, THAT YOU CAN MAKE SUCCESS HAPPEN BY CONTROLLING OUTCOME WHILE IGNORING THE ACTUAL RANDOMNESS OF THE MARKETS.

            The emergence of gambling mind is always a possibility in trading.  The primitive survival orientation of the emotional brain becomes locked into pattern and triggers when your brain is faced with challenge and risk within a short time frame.  What is triggered are ancient solutions to conditions that no longer exist in the modern trading world.  What we are going to look at is the overlap between the ancient world (which your brain adapted you for in times of challenge or stress) and the modern world of forcing a brain to perform tasks for which it was not designed – and seeing what happens.  Let’s start in the beginning.

Over-Trading Based on the Impulse for Striking It Rich

            Part of our evolutionary psychology seeks the pot of gold at the end of the rainbow.  To believe that you are going to overcome all odds and become a winner (evolutionary survivor) is the first bias that leads to a gambler’s mind rather than a Probability Mind.  Yet from a survival perspective, the development of this bias to believe irrationally in your capacity to prevail where others failed was essential in development of our species’ success.  It worked, and was adapted into the survival mind.  Your emotional brain was biased to believe it would prevail.  Good for survival, but bad for developing an effective mind for managing the randomness of the markets.

            Trading is about the management of randomness with a small edge in probability in a vast ocean of uncertainty.  Yet traders run the numbers and believe that trading can become the pot of gold at the end of the rainbow.  It drives them to believe that they can win by making things happen.  Casinos have been taking advantage of this inherit flaw in our biases for a long time.  They know that winning and losing exist on a continuum of randomness – but the trader believes he will prevail and does not see the randomness factor.  Instead, he stays focused on the perceived pot of gold at the end of the rainbow. It is that bias that leads the trader to not see the randomness because he is so focused on winning (survival) and not losing (termination).  This is the set-up for falling into gambling mind – where randomness and uncertainty favor the casino, especially when the trader refuses to see the power of randomness built into the markets.

            Most people become traders because they want to experience financial freedom and time freedom.  They look at trading, run the numbers, and discover that they can make a lot of money IF they are able to control their emotions – which they believe they can do.  And that excites them with an urgency to trade and act.  But they do not even see the survival biases influencing their thinking.  That expectation of making money fast falls into an old bias of the emotional brain.  Take advantage of the situation RIGHT NOW before the opportunity gets away!  Then dopamine flows and establishes an expectation of success that becomes wired into the trader’s mindset. 

            That desire to feel the dopamine rush of financial success totally blows out any rational content of the human mind.  The need for success (survival in the moment), in the view of the emotional brain, is so strong that the Thinking Brain is simply taken off-line as part of a decision-making process in the brain.  This is what the trader has to reprogram.  Yet he is being asked to retrain an aspect of his humanness that is outside of his conscious threshold – a subconscious drive.

An example:

            A while back I was talking to a group of traders who signed up for an expensive, all-inclusive training package from a large trading training organization.  When the instructor asked the audience what were their trading goals, they ALL reported goals of making a lot of money (survival success), and they did not anticipate a down-side, which this training did not discuss.

            They honestly believed the training they were about to receive would give them the tools to become successful financially.  They were being led to believe the system they were learning would provide the means for success.  Yet the ancient programming of the emotional brain and its inherent biases were only given lip-service.  Buoyed by the motivation for success, they believed that they would have the tools needed for success – never recognizing the powerful unconscious emotional biases that trigger under stress.

            No one mentioned the dismal success rate found in trading as traders flail against the wall of their ancient survival biases.  But these traders did not see the biases of the limbic system steam usurping the Thinking Brain.  They only saw success against all odds – that pot of gold.  And yet their ancient survival instincts lay beneath their irrational beliefs about winning when exposed to random outcomes.  It is this inherent bias (short term success) that pushes the trader forward. 

It is this success against all odds that is the gambling directive being activated.  No one is acknowledging that the old rules no longer work.  And they remain stuck in them.  This is the set-up to bet against the casino, while the casino knows that if the trader stays at the table long enough, the rules of randomness will prevail over the trader’s irrational belief that he can succeed where nearly all others have failed. 

            How many of you push yourself for success and believe that success is right around the corner?

            Many find risking capital exciting and it gives them a rush not found elsewhere.  Some feel fully alive when faced with Uncertainty.  It’s addictive.  You are biased to make things happen.  And in that escape from boredom in pitting the trader’s wit against the markets, the trader believes he can win by having a magical belief that he is going to win.  This (believing that you can make winning happen and the ensuing excitement) is also an ancient survival bias that ignores the notion of working with uncertainty and randomness to make things happen.  It’s good for survival of a species, but bad for becoming a consistently profitable trader. 

            The trader wants in the game to show he can prevail and make money.  The problem is that the trader has little power over whether he wins or loses.  Both are only probabilities that exist in the randomness of the markets.  Winning is ONLY landing on the right side of probability relative to the trader.  And losing is only landing on the wrong side of probability relative to your biases.  The outcome is random with only a slight edge provided by the trader’s system.  That “edge” is only a skinny advantage in the vastness of uncertainty and randomness.  A new way of understanding and managing the randomness of uncertainty has to be built to replace the primal programming that sets the trader up for slipping into gambling mind.

            As long as the trader “thinks” he will win, he has been hijacked by the gambling gene, particularly when the trader perceives he is missing opportunity.  The urgency to act ushers in the gambling gene.  The only control that the trader really has is over his performance.  Winning and losing are simply part of the randomness of uncertainty.  (But don’t tell that to the survival instincts of the emotional brain, which control the kind of thinking that the trader brings to the performance of trading.)  That excitement that the trader feels simply hijacks the potential of the probability-based mind that must be in place for effective trading.  Otherwise the excitement leads to moods of euphoria that cause the gambler to believe that he is trading while, in fact, he is gambling.  Meanwhile the casino takes the money.

Making Up for Prior Losses

            This is one of the most difficult aspects of gambling and trading that the trader and gambler ever face.  There is a strong bias to “get back” what you lost.  In trading, this is called revenge trading.  Once those losses hit, a panic button is activated in the gambler at the casino and the trader after a series of losses.  It is the fear of death being called into play.  Specifically, trying to avoid crushing defeat – or to the ancient survival instincts of the emotional brain: death. 

            In a world governed by randomness, the losses exist as probability.  Great traders simply move on because they have trained themselves to let losses go and to focus on performance rather than outcome.  Gamblers do not perceive it this way.  They believe they must make up for those losses as if they have control over the random events of winning or losing in trading.

             This is an evolutionary survival trait that served man well historically.  But for a great trader, in the management of the uncertainty of randomness, the losses no longer trigger the urgency to “get back” the money.  The trader lets go and moves on - but only after he reprograms the instinctual need to get back the money lost.  It’s gone.  It got swallowed by the massive sea of randomness and cannot be retrieved.  He/she focuses only on the performance in the here and now.  It is adherence to the standard practice (trade after trade, day after day) of your edge that will allow for consistent profitability.

            Whether it is in the casino (where the casino encourages the gambler to “get back” his money and then quit) or in trading (where the gambling trader blows another account due to his survival bias to make up for prior losses) – it doesn’t matter.  It is difficult to convince the gambler or the gambling trader to accept that the money is gone and that the only real power the trader has is to focus on the performance of the trades he/she is engaged in.  The gambling gene has to be tamed if the trader ever expects to become consistently profitable.

New Mind, New Engagement of the Uncertainty of the Management of Randomness

            It’s not easy to retrain the ancient brain you brought to trading so that it moves from a winning mindset to a probability mindset.  You are asking it to do something that is completely alien to it.  And you have to become a new Observer of the Self that trades.  The connection between gambling, as a once useful survival skill that led to the rise of human beings becoming the dominant species on earth, and the advent of the probability mind is simply another step in the evolution of the trader.  It is also a step that few traders can make because it is all happening below conscious threshold. 

            I encourage you to look deeply into your trading performances and start locating your gambling gene.  Transform the implicit crash and burn of your tendency to fall into gambling mind into explicit knowledge.  See it in action.  That is the first step in freeing yourself from your survival biases – they are killing you in today’s trading.  Become the designer of the mind you bring to trading.  Start with locating these powerful biases that stand in your way.  They have been hidden by you – and, yet, are in plain view.  Trading success demands the trader to awaken to this new way of managing the uncertainty of trading.