Articles on Trading Psychology by Rande Howell, Trader Psychologist

The Silent Partner in Your Mind that Creates Trading Havoc

What You Don’t Know About Yourself Will Hurt You

   You have a silent partner in your trading business.  He’s so silent that he is easy to ignore and pretend that he’s not even part of your mindset.  Particularly if you don’t even know what to look for.  Out of sight, out of mind.  Until things start heating up, you wouldn’t even notice him lurking beneath your awareness.  He’s just lying in the background, easy to ignore, with you seemingly in rational control. It seems like such a great partnership.  You believe that you are reasoned and in control with your emotions hidden away.  This is how traders want their mindset to work when trading.  It is so easy to ignore the presence of your silent partner.  And, when calm, your silent partner (your emotional brain) seems to play by your rules also.  At calm moments, the emotional beast seems very tame.

   Then you find out suddenly and without explanation – not only is he a silent partner, he is the majority partner and commands the mindset you bring to managing uncertainty under stress.  You don’t realize that until push comes to shove.  It is in those moments that things inexplicably shift for you from being in control to losing control of the mindset you bring to the management of uncertainty.  Now your silent partner has mutinied and has taken over.  The rational mindset that seemed so in control just moments ago is gone.  And in its place is a raging bull.  Where on earth did the raging bull come from?  Moments before, it looked like clear sailing.  Now emotional storm clouds crash the rational mindset and leave an emotional hijacking in their wake.

   That silent partner of yours can turn your mind into a mind rooted in fear, a mind rooted in impulsive behavior, or a mind rooted in anger - seeking to make up for prior losses.  The point is that you never saw it coming BEFORE it blew away your rational mind.  Your silent partner is like a submarine.  You don’t see it, though it is there – lurking in the depths.  Then, suddenly the emotional torpedoes are released and the damage is done.  And until the trader learns to deal with the submarine called his emotional brain, all the logic and reason needed for effective trading is blown up just when you need it most.

Learning to Work with Your Silent Partner is Essential for Success

   The thinking brain and the emotional brain work as a unit and are inseparable from one another.  Emotion and reason are literally partners that work together to produce the trading mind.  From the cradle, people are taught to elevate the reason of the thinking brain above the brute force of the emotional brain’s survival instincts.  By the time people begin studying trading, they have a bias to see through the eyes of the thinking brain as if it were the truth.  And as long as the survival instincts of the emotional brain are not activated, it does appear that the thinking brain runs the mind’s show.  Your silent partner is quiet and appears really tame.  Logic seems so in charge that it appears that the emotional brain really is not contributing to the way you perceive and act – until it is activated.

   Then the true nature of the relationship between the thinking brain and the emotional brain is revealed. Emotion drives thinking.  You are not a rational being who has emotions.  Rather, you are an emotional being who rationalizes what the emotional brain has already decided.  You don’t see the emotion behind the thinking, typically, because the emotion is calm BECAUSE IT HAS NOT BEEN ACTIVATED BY CIRCUMSTANCE.  Yet it is there.  Your survival instincts act like a trip switch, always on the lookout for danger or for opportunity to be exploited, depending on the predisposition of the trader.  It is poised to be activated in a moment’s notice.  Yet it sits beneath the threshold of the thinking brain’s awareness.  It’s so easy to ignore.

   What is the emotional brain on the lookout for?  It is scanning the environment for threats to its control.  Your emotional brain has a hardwired need to be in control of outcome and to be able to predict outcome.  You, as a trader, experience this evolutionary bias as a threat when your emotional brain perceives it cannot control outcome or as an impulse to act to take advantage of a situation.  As emotions interacting with the environment of the markets, you experience this phenomenon as a fear of loss or as an impulse to take advantage of opportunity.  Both come from our distance past as hunter-gathers where fear of the unknown (uncertainty) and the excitement of the chase (hunting big game with your wits) were survival adaptations in an uncertain world.  These are the survival instincts of your silent partner that you bring into trading – ready or not.

   And, as a trader, you carry them with you into every encounter with uncertainty you engage.  You are always on the edge between your silent partner appearing calm and transparent to your awareness and having your silent partner activate the survival instincts of your emotional brain.  Any time you experience uncertainty, you also experience a biologically driven loss of control.  This is the fear of loss that takes over the thinking brain and causes you to freeze, as your thinking brain wants to pull the trigger.  To the survival instincts, this is a victory.  By not letting you get into the trade in the first place, you have minimized the potential of loss.  This is a victory to the short-term survival focus of the emotional brain – by not getting into the trade, the threat of loss can be averted.  The emotional brain is incapable of understanding that you have also lost the potential for long term profit.  Your silent partner has a completely different agenda than the thinking brain – which has now been hijacked by the power of your survival instincts.

   The hunter in the trader experiences a different bias.  There is an excitement that builds for the hunt (feeling that urgency to act).  Hunting big game with spears and arrows demands an instinct to chase the opportunity, although there is significant danger.  The excitement takes it over the top and the hunt is on. (Have you ever jumped into a trade and later wished you had not?).  Think about what it must have been like to hunt and chase down a giant mastodon.  That desire to chase is necessary as is the excitement needed to overcome the danger of engaging such an animal.  Every time you have experienced impulsiveness when you have jumped into trades, you have experienced this old adaptation for survival.  The problem is that the behaviors are no longer adaptive for the survival of the trader in the new world of probability.  You literally are going to have to learn how to work with your silent partner very differently – survival vs. probability.  Instead of your survival instincts dictating what you do when you experience the uncertainty of engaging the challenges of trading, you will need to teach the emotional brain a very different way of engaging uncertainty.  Not from a survival perspective (that’s the mind you came to trading with), but from a probability mindset that unlocks survival from the management of uncertainty.  

Learning to Work with Your Silent Partner

   The most important thing is to understand that you have a silent partner in the survival instincts of your emotional brain - whether you like it or not.  It sits ready to knock out your thinking brain’s access to knowledge in the flash of a moment.  And ignoring it simply sets the trader up for trouble.  With understanding and training, the emotional reactivity of your emotional brain’s survival instincts can be regulated so that your thinking brain is not hijacked just when you need it.  Even better, you can learn how to create a highly effective partnership between your thinking and emotional brain that can allow you to take your trading to a new levels.

   From that new-found understanding of what makes the emotional brain’s survival instincts tick, the trader no longer steps ignorantly into harm’s way.  The first skill that I encourage you to learn is to observe your body and your mind so that you can catch emotional triggers before they become dangerous to your trading mind.  You do this by noticing the build-up of muscle tension in your body.  Muscle tension is always an indication of emotional arousal.  As the emotion gathers strength, the muscles of the body move from a relaxed state to a tense state, poised for action.  This is called emotional arousal.  It is here that you first learn how to work with your silent partner.  Relaxing the muscles also calms the emotion down.  As you calm the emotion down, your silent partner does not seize control of thinking.  People who learn how to observe the arousal of an emotion as muscle tension have the advantage of not being emotionally hijacked out of their ignorance.

   Working with your breath is similar.  As an emotion escalates, your breathing changes.  Most people notice that they hold their breath or start breathing shallowly as the survival instincts take over their conscious mind.  Yet, if traders train themselves to observe the change in breathing BEFORE IT BECOMES A PROBLEM, they are able to use bellows breathing to re-establish emotional calm.  The management of muscle tension and breathing are necessary to keep your silent partner calm so that it does not mutiny and take over the trading mind.

Getting at the Emotional Learning that Drives Emotional Reactivity

   Traders also have to unlearn much of what the survival brain has learned about uncertainty, which is seen as dangerous to the survival brain’s need for control over outcome.  This is clearly the most important part of building the mind that trades.  Rarely do traders bring a mind that is capable of success to trading.  In fact, your very emotional nature is built for short-term survival and control.  Successful trading requiring that you seek long-term benefit (rather than short-term survival) and let go of trying to control outcome.  The old adaptation of your survival instincts has to be undone so that the probability based mind can become the new learning that drives your emotional brain when it engages uncertainty.

   Right now, the emotional learning encoded into your brain views uncertainty as a threat to your survival.  When your brain experiences uncertainty, it automatically triggers to vulnerability.  What happens at the level of vulnerability is the difference between success and failure in trading.  The history you bring from evolution automatically triggers to fight/flight as a response to vulnerability.  That emotional learning will not change by force or wishful thinking.  

   It will change when the amygdala (seat of your emotional reactivity) learns to trust the thinking brain (its necessary partner in managing probability) rather than short-term survival.  Or using our analogy, your silent partner.  That means that the neural circuit that connects uncertainty to vulnerability learns that losing a trade does not mean death (fear of loss).  Vulnerability no longer means danger from the survival point of view of the emotional brain acting alone in the world.  Vulnerability means probability instead.  This new learning overturns the survival orientation that has guided the emotional brain’s adaptation to uncertainty.  This is a major feat, which few traders accomplish.

Why Is It So Hard?

   As motivated and hard working as traders are, why do they stumble over the survival instincts that drive the emotional brain?  Mainly because all humans (including traders) have a deep need to be in control.  And as long as the trader identifies with the thinking brain as the important part of the brain and mind for trading performance, the trader creates a narrative (a story) that minimizes the impact that the emotional brain (your silent partner) has on engaging and dealing with uncertainty.  The thinking brain really wants to be in control (even though your trading account tells a contradicting story).  The truth is that the thinking brain and the emotional brain have to give up the illusion of control over outcome and over being able to predict outcome.

   It is at this point that true partnership between your emotional brain (your silent partner) and your thinking brain becomes possible.  All traders have a fear of loss from our hunter/gatherer heritage that has to be modified from the mind you brought to trading, so that you can function in the world of probability.  Acknowledging the fear and then working with it effectively (rather than attempting to ignore it) is the missing piece.  It requires training, not platitudes.  Developing the probability mindset is literally going against the grain of your evolutionary adaptation.  There will be resistance to change on this level.  Fortunately your brain is an adaptive organism and can learn to shift from a survival orientation in response to uncertainty to a probability based mindset that engages uncertainty.  To do that, you must start talking to your silent partner. 

   It is there, lurking in the background anyway.  Learn to acknowledge its presence.  Learn to calm it as you engage uncertainty BEFORE you experience the inevitable vulnerability.  Talk to it calmly.  Let it know what you are doing before it gets a head of steam worked up and plows through your capacity to think under pressure.  Allow yourself to feel the vulnerability as you regulate its intensity.  Then check out your deepest beliefs you hold about your capacity to manage uncertainty.  It is here where your implicit performance beliefs lie.  It is these beliefs that have to change.  First by acknowledging them, then by proving that you can move through uncertainty and vulnerability effectively by training yourself to have a probability based mindset.  Every trader, if he or she is to become successful, has to do this.  You turn toward your fear and master it.  You do not conquer it.  You master it so that you do not fear uncertainty, but approach it from a calm and disciplined mindset. You become the designer of adaptation, rather than being run over by your silent partner.

   Trading becomes a journey into self-mastery.  Where there is fear, there is opportunity to redesign the way emotions interact with uncertainty.  Uncertainty will always elicit a sense of discomfort.  But that discomfort can be retrained so that it does not activate the fight/flight response to uncertainty and vulnerability.  At this point your silent partner (the survival instincts of your emotional brain) and your thinking brain become effective partners.  And you operate out of a probability based mindset rather than a survival based mindset when engaging uncertainty.  In this probability based mind, you seek neither to win nor to lose, which are out of your hands.  Instead, you seek to control what you can really control – the mind you bring to the engagement of uncertainty.  In the probability based mind you seek performance in the moment.  This is the missing edge required for success in trading.    

Mastering Trader ​Psychology