Mastering Trader Psychology

The Invisible Wall:  What Has to Change for You to Develop a Mind Built for Trading?

     “Trading is a lot like getting around in a pitch-dark room that you thought you knew like the back of your hand.  You discover that someone has rearranged the room in addition to turning the lights out.  Everything you thought you knew with confidence is now foreign.  Your always reliable vision is now useless.  And your memory of the layout of the room keeps causing you to run into things. 

     It’s like you have hit an invisible wall that is not supposed to be there.  But, regardless, it is.  And it won’t go away no matter how hard you try. The question is: Are you going to continue to use skills that clearly no longer work, but bring you comfort – or are you going to develop a new way of “seeing” that allows you to negotiate the environment with a very new, and different, set of eyes?  Eyes that learn to adapt to the new circumstances of the world you must negotiate. 

     This is the Invisible Wall that trading presents.  Do you try to force the old ways to work, despite their limitations?  Or do you develop new ways of understanding the world around you.  The room doesn’t care – it’s just a pitch-black room that’s been rearranged. Are you willing to learn a new way of “seeing” that can make sense of the world in which you are now embedded?  This is the journey that an evolving trader must be willing to take.”

 

Your Old Rules Need Not Apply

     There comes a moment when a struggling trader has to acknowledge that what they are doing is not working.  Nothing in your performance in trading is going to change until this realization humbles you to the bone.  After all the talk is done and when you realize that all those “feel-good” notions of success simply don’t work in trading (no matter how much you believe in them), it really comes down to what your trading account reveals – Is it growing; it is stagnant; or is it shrinking?

     Despite your optimistic rhetoric, how many accounts have you blown up?  How many of you are not profitable, or only marginally profitable?  If you fit into the norm – it’s between 95% - 98% of all traders.  Ouch!  To be honest, your current performances (leading to the health of your trading account) have been primed by a brain that will never accept the uncertainty of the unknown, despite all that “stuff” you used to predict the outcome of a pivotal moment in managing the uncertainty of a trade.  All the indicators and levels do is give you a sense of probable direction – that may or may not happen. That sense of probable direction gets interpreted by the survival instructs of your emotional brain (remember, you are already primed for it) as hopeful deception.  At the bottom of your survival instincts, your brain wants to be right in the interest of short-term survival when it is forced to engage uncertainty with real risk involved.  So, for you the trader (coming into the arena of trading with a primitive brain that you have never trained), at first you jump into trades.  Then you blow up.  Then the emotional brain, through adaptation, learns to avoid jumping into unwarranted trades (and to it, all trades are unwarranted – since short term discomfort equals biological threat).  Now you have fear about getting into trades as well as fear that your potential profits will be taken from you.  This is the untrained brain on trading.

     The question is:  What are you going to do about it?  Staying the same course is not going to work.  Pushing harder has proven disastrous.  How about if you start by learning to understand the brain on trading.
 

Why Is the Trading Account So Important?

     Your trading account tells you how much money you are making or losing, right?  Well, somewhat.  The most powerful function of your trading account is, first, it does not lie to you the way your Thinking Brain lies to you. No matter what kind of explanation your Thinking Brain is gaming you with – your trading account does not buy it.  It will tell you the truth – whether you like it or not.  It will cut to the bone.  But what is the bone?  The bone that the trading account reveals are the very beliefs (hidden from awareness and that you do not want to acknowledge) that your mind is projecting upon the markets.  It becomes the measure of how effective your beliefs are in extracting capital from the markets.  The effective beliefs that grow a trading account are the ones that extract more capital from the markets than you are giving back. 

     Notice that the beliefs that you are projecting upon the markets (and receiving feedback for) in your trading account do not represent the “truth” that will set your trading free.  The beliefs are only assumptions that your brain has wired into your perception and that have taken on the emotional feeling of truth – but not truth itself.  But to you, as a well-intended but mindless trader, it “feels” true and you act as if this assumption, turned belief, is true.  And you keep listening to your feelings from the deception of your Thinking Mind, rather than your trading account (which assumes you are trading your beliefs and not the truth). This is one of the first deceptions of the mind that you have to master in your journey to become a consistently profitable trader – and move from the potential that trading offers you to the reality that trading can deliver to you.  It’s about getting beyond that Invisible wall that you keep running into. 

While You Weren’t Looking, the Emotional Brain Was Directing Traffic

     Thinking has very little to do with decision making in trading.  It looks like it’s all about thinking (and certainly that is the way that trading is taught); yet thinking is the very last thing that shows up when you act on embracing uncertainty and risk.  A whole bunch of emotional evaluation has gone on in the brain first.  Finally, after the heavy-lifting of the organism (that’s you the trader) engaging uncertainty and risk, the Thinking Brain produces an explanation for whatever the Emotional Brain has decided. 

     The problem is that you most likely have no idea of how this process actually works. It is so far below the thinking centers of the brain that you (focused on the false assumption that you are a rational being) do not even recognize that you have hit the Invisible Wall of Limbic Evaluation.  At least until now.  One point to remember here:  the emotional brain CANNOT (left to its own devices) distinguish the difference between biological threat and psychological discomfort.  And your Thinking Brain has totally taken away the pre-verbal centers of the emotional brain from your awareness – this is trouble, trouble, trouble.  It is like boxing with one hand tied behind your back.

     So, here is what happens when you “think” you are making a decision under the stress of uncertainty and risk.  First, neural information is coming into the sensory thalamus area of the brain for evaluation.  Here, something like a raffic cop is directing where that sensorial information is going to be routed.  Now this is where it gets interesting.  Because in a nano-second a decision is made about the danger or other status of that information.  THERE IS NOT THINKING GOING ON AT THIS TIME.  It is purely instinctual. 

     That decision is made by limbic evaluation and learning.  It is all pre-verbal.  The Thinking Brain has no input.  It thinks it is in control, but it is not. That limbic learning is grounded in the instinctual need for short term survival.  And once learned (proven positive for short term survival), it is locked into synaptic pattern so that any familiar event triggers the successful adaptation.  Remember, this is short term focused.  Freezing at entry, jumping out of trades early, revenge trading, over-trading, and losing emotional control are simply symptoms of this process.

     Based on implicit biases and assumptions (subconscious beliefs) that “Traffic Cop” makes a decision to route the information either to the Thinking Brain (good for the trader) or to the Amygdala, home of the primitive fight/flight response.  The routing of information to the Thinking Brain takes a long time but produces the rational interpretation of sensory data that the trader needs.  BUT if the Traffic Cop interprets the incoming sensory information as a threat, that information is routed to the amygdala on a very hot, and fast, neural circuit.  And the information is NEVER sent to the Thinking Brain.  This is what is called an emotional hijacking. 

     If you have ever thought to yourself, “What was I thinking?” after messing up the execution of your trading plan by doing exactly what you promised not to do (abandoning your plan) – you have experienced the emotional hijacking by the Traffic Cop in the emotional brain.  Thinking NEVER EVEN OCCURRED.  This is the Invisible Wall that the Thinking Brain CANNOT see without help and requires learning a new set of implicit beliefs from which the Traffic Cop can interpret. 

     Understand, there is nothing wrong with what the emotional brain is doing.  It is built to make lightning fast decisions for short term survival when you are faced with uncertainty with real risk on the line (like your life).  Thinking only catches up with the action AFTER the survival instinct emotions (fight/flight) have taken over.  Then thinking is only producing an explanation that supports what the emotional brain has already decided. 

Do You Really Want to Learn How to Trade Effectively?

     The answer is hard for most to swallow.  The vast majority of traders want to make money – and easy money at that.  So focused are they on making money, winning, and not losing that they never see the Invisible Wall that they keep running into.  That Invisible Wall requires a new way of “seeing” the sensorial information coming into the brain.  It is the emotional management of your response to engaging uncertainty and risk that has to be learned.  You have no control over whether you win or lose – but most traders are consumed by winning and losing.  They are possessed by something that they can never control.  What they can learn, however, is to control the mind that they bring into the moment of performance.  This is the Holy Grail of trading – and it is hidden behind the Invisible Wall that you keep running into.

     You are an emotional being that has deceived itself into believing that emotions can be controlled or pushed away.  You are emotion.  Thinking emerges from emotion.  That is what your trading account is trying to tell you, if only you could learn the language it speaks.  You are not separate from the experience of trading. 

     Those numbers in your charts are measuring emotional response to the changing tides of uncertainty and risk.  The numbers have your Thinking Brain fooled.  Those numbers really are emotional representations of people’s gut reactions to engaging uncertainty and risk.  And being smug does not work.  No one gets to hide behind numbers in the belief they are factual.  Just ask your trading account about that.  Are you willing to be humbled and realize what you never knew?  There is no certainty.  When trading, you are riding on the seas of uncertainty with an edge in probability – if you are smart. 

     Turning that edge into consistent probability requires that you build your vision so that you can see the Invisible Wall that separates you from managing the emotions of uncertainty and risk.  Let go of the illusion of control over outcome and embrace building the mind that you bring into the moment of managing uncertainty.  It is not natural.  But, by design, it is possible.  Then the advantage you need becomes possible.  You can become designer of the mind that engages uncertainty rather than the programming that natural selection and evolution built into you.  This humbling is a powerful gift for those with the eyes to see.

Articles on Trader Psychology by Rande Howell, Trader Psychologist