Mastering Trader Psychology

Articles on Trading Psychology by Rande Howell, Trader Psychologist

The Anatomy of an Emotional Hijacking

              To an outsider, the problem outlined in the vignette above seems obvious.  This trader has a fear of loss.  And it is easily correctable if he only (logically) follows his trading plan rather than getting swept away into an emotional storm.  The hidden assumption here is that he is a rational human being and that reason can overcome emotion.  This is a biased assumption (with no proof) that crashes many traders day in and day out.  The biased assumption is that you (at the core) are a rational person.  You are not.  That is far from the case.  Actually, you are first an emotional being whose mind rationalizes an alibi to support whatever the emotional brain has already decided.  And the biggest problem is that your brain and mind are lying to you and you keep falling for the same lie again and again.

              You are doing this (a common case of fabricating a story to explain your lack of performance) all the time in your regular life (your life outside of trading).  And you are getting away with it because the cause (your thinking) and the effect (outcome) are so far apart that your brain/mind can deceive you into believing that your rational mind is in control (even if it has to lie to do it).  That’s what it is like in the regular world.  In the foreign, trading world, time is very different.  It is compressed.  In the vignette above, time shrinks into the interval between placing an order and that order being filled.  That’s not a lot of time between cause and effect.  The deception of the human brain/mind, that you are in control (you’ve got all your ducks lined up for a winning trade), is put to the test.  The stress (anxiety – fear about what might happen in the near-term future) comes from your illusion of your control being busted.  Even if you talk yourself into the fiction that you are going to win, you are going to find out sooner rather than later whether your guess is going to fall into the right or wrong side of probability (win or lose).  You power to bend the future by your winning attitude is found to be an illusion.  You have no control over outcome – you never did. 

              Now the reassuring lie (you are going to win – and not lose) is confronted by the inconvenient truth of potential loss.  This is where the survival instincts of your Emotional Brain awaken in nano-seconds and push aside the logic of the Thinking Brain.  And you never saw it setting up because your brain was not built to manage probability!  It was built to always be in control of outcome, no matter what.  And in the reality of trading, the trader comes to face a new assumption – that he or she has no control over outcome.  But (and this is a big BUT), the trader does have control over the mind he/she brings into the moment of performance.  It is your performance you control, not whether you win or lose.  But don’t tell your Caveman Brain that!  He or she is all about surviving – and being in control is what your Caveman Brain is all about.  The problem is that this bias does not work in trading. 

Winning and Losing – a Caveman Perspective

              Winning and losing meant an entirely different thing for our Caveman ancestors than it does for the modern trader that you are trying to be.  Unfortunately for you, the trader, these perspectives get scrambled so that both Caveman Brain (your survival instincts) and your Thinking Brain (your rational brain) are present at the same time when you are experiencing stress.  This is the problem, both in the vignette above and within the brain/mind that you bring to trading.  You are facing Uncertainty when you trade and you are risking capital under the stress that Uncertainty triggers in your brain.  Caveman is on alert!  While you are logically about to execute your trading plan to manage risk and reward, your Caveman Brain is ramping up to deal with a threat to its existence. 

              Paramount to the Caveman Brain is not money.  It is your sense of security, it is your power, it is your well-being, and it is your status among your tribe.  When confronted by Uncertainty with life (money) on the line, he has to win.  He has to prevail.  Remember, at this time of our evolution, danger was an ever-present condition of our existence.  He if won, he prevailed and lived another day.  He proved his power (made money on the trade), he gained status within his group and had preferred access to the mates of his time.  If he lost, he became somebody else’s meal.  Winning and not losing were profound influences on the success of our species.  The bias of winning and not losing was so successful it became embedded into our genetic predisposition.  And you brought that bias, so successful in the past, to trading.  Unfortunately, your biased tendencies are not a foundation for success in trading,

              If you are going to find success in trading, this selected trait of our successful survival will have to be dismantled and replaced with something alien to our ancestors – the Probability Based Mind.

The Engineering of the Probability Based Mind   

              Now that you have a better understanding of the problem of why emotions keep seizing the mind at all the wrong times, the possibility of rebuilding the trading mind can become possible.  Where does that start?  With emotion.  You are the embodiment of emotion.  Emotion is what directs the output of the brain (what you call behavior).  And what we really need to do is to focus on what happens when your survival Caveman Brain engages Uncertainty.  Rest assured, it will see Uncertainty as a threat, just like it did to the trader in the vignette that opened this article.  If you know that, be prepared for it.  By volitionally altering the way you breath, you can control the intensity of the emotion so that it does not hijack your thinking capacity.  That’s called emotional regulation, and it is ground zero in developing the trading mind.  Next you are going to have to learn how to step back out of thought and beliefs.  This is called Mindfulness or awakening the Observer of the Self.  This degree of separation between thought and being is critical.  You are not your thoughts or beliefs.  In fact, you do not have thoughts and beliefs – they are having you.  (This is also what is happening in the opening vignette.)  The trader’s Observer fuses to the thoughts of his anxiety so that he ends up acting from them. 

              The key is to build the mind exclusively for performance.  This is the aspect of trading that you can control.  And with the statistical edge that your methodology provides you, your performance mind can execute so that your edge can materialize.  Winning and losing becomes an artifact of another time and place.  Its usefulness is no longer providing the edge in living that it gave your Caveman ancestors.  Your trading edge is grounded in the performance mind.  This is something that your Caveman ancestors could not have imagined.  Yet, right now, it can become the new frontier of your trading evolution.  This gift comes with the awakening of you as a conscious designer of the performer you are on the stage of the world.  And trading points the way.    

The Missing Link: Mastering the Emotional Storms that Take Back Your Profits

              “It’s the same problem over and over again.  I start getting nervous after I’ve placed my order and before it is filled.  In that space of time, I start worrying about the potential of losing. The longer I wait, the more stressed I feel.  I keep pushing it back though because I know I cannot let the fear win.  Because if it wins, I lose – and I don’t want that to happen.  That’s what I know to be true.  By the time I start managing the trade, it’s easy for me to fall apart and start making emotional decisions that take me out of following my trading plan.  And bad trading decisions happen that take a chunk out of my trading account. I’m trying hard to stop this from happening by controlling my emotions, but it keeps on happening anyway.”