Articles on Trader Psychology by Rande Howell, Trader Psychologist
"The Truth is in the Eye of the Beholder" -- Plato
Blinded by the Beliefs You Bring to Trading
With a subconscious set of mental filters formed from beliefs and experiences, every trader interprets the same information differently. How does this work in trading? You know it’s possible to trade at a higher level, but something invisible keeps getting in the way. It’s frustrating. You see a small, elite set of traders succeed at trading day in and day out while you continue to struggle. It’s mystifying. On the surface, both you and the elite trader and know “their stuff”. So it’s not so easy to see what separates them from you.
Both of you can “talk the talk”. They don’t work any harder than you (maybe even a good bit less). So, what gives? What you notice is that they do seem to be able to keep their act together in good times and bad. They don’t seem to crumble with fear, nor do they get over-confident and do stupid things. You think - maybe they were born with more talent than you – but you know that’s just an excuse.
What does separate you from traders at the next level? Is it that they are just better? No. The biggest hurdle that challenges the growth of a trader is not more knowledge – it is self-knowledge. What do you really believe about yourself when no one else is looking? Getting to know what makes you tick under pressure is what traders avoid until there is no other choice. Yet, this is the difference maker.
Indeed, struggling traders steer clear of really getting to know themselves under pressure for as long as they can. They can “talk the talk” of trading, but they never grab the bull by the horns and learn to “walk the walk”. Often, this continues until they simply run out of capital or have squandered too much time. Meanwhile the journey of the elite trader is characterized by turning towards the discomfort of facing down his or her self-limiting beliefs.
Ultimately, traders come to a fork in the road. They have to learn to see (and change) what they do not want to see about themselves. This is like taking a fearless inventory. Do they want to continue the same old patterns of mediocrity? Or do they want to come to grips with what they have been avoiding? Do they want to continue the fiction they have been telling themselves about success being just around the corner? Or do they want to get to know themselves and actually do something about their underlying fear-based beliefs that compromise performance and the truth they see in the numbers?
It is these self-limiting beliefs and biases that have been holding them back. In particular, it is the unacknowledged fear-based beliefs that traders filter their information through that torpedoes their quest for trading success. And by continuing to see through the eyes of fear, they have been blind to the path leading to the next level. What does this look like in trading? In fear-based perception, performance is rooted in self-limiting beliefs about adequacy and personal power. In impulse trading (chasing trades), it is about proving your worth by winning.
Turning Fear into an Asset
Fear is the oldest of emotions. It is far easier to avoid dealing with a threat than it is to deal with it head on. Early humans learned this survival wisdom and learned to avoid dealing with threats head on. Fear was simply an adaptive response that was successful for survival. Fear was so successful a response to threats in the environment that it was bred into our genetic heritage as a trait.
It is here that the seeds of poor performance in trading occurred. Humans evolved with a prime directive to control their environment as a way of ensuring survival success. It was imperative to control outcomes. Anything unknown was considered a threat until proven otherwise. The unknown was threatening. It was avoided through fear or attacked through aggression. Even this response to threat was encoded into our emotional nature as the fight/flight response.
The problem with this solution was that it pitted two drives against one another – controlling environment and outcome vs. embracing the unknown – that manifested itself long after the biological threats to survival disappeared from the caveman’s world. The emotional brain was still designed to be on the lookout for biological threats to its existence and to attack or avoid when it encountered the unknown. When applied to trading, these two drives collide in a spectacular way. The emotional brain has a drive to control outcome in the short-term, while trading presents a situation where the outcome is unknown and the trader has to learn how to embrace the uncertainty and vulnerability of the unknown.
Something’s gotta give. Until the trader learns to re-train the brain into embracing the uncertainty and vulnerability of not knowing, a trader’s psychology is no match for the powerful survival drives that give rise to the mind that engages uncertainty. It is here that the trader has to start doing something completely unnatural to the self that evolution has organized – the trader has to turn toward the fear of the unknown represented in risking capital (life) while trading and change the response. The fear lets you know the old survival programming is activated – that’s the asset – now it is time re-train the brain to move from self-preservation in the short-term to probability thinking for long-term benefit. This is the training that the elite traders have accomplished, one way or the other, to create the mind and psychology to embrace the uncertainty and vulnerability of the unknown.
The Brain and Mind on Trading
The vast majority of trading decisions are made in the blink of an eye – and totally outside of working awareness. The brain already has a working model of the world that it projects “out there”. It works behind the scenes keeping you safe on a path through the dangerous jungle of threats all around you. You would never know it is there until you begin to question why you keep doing the same things that short circuit your long-term potential of winning in favor of a short-term survival response to the threat of risking capital.
Most will never notice that you “see” through the eyes of survival in the moment even while you rationally “talk” about risk and reward while following your rules. Your conscious mind thinks that it is in control and that you have an “edge” because of your rules. It all seems so very tame until the rational mind is hijacked. Then real capital is put at risk, and all bets are off. Suddenly, the “talk” of risk and reward from a logical mind is simply snatched away and replaced by a mind that equates capital at risk with a biological risk to life in the moment.
Your logical trading rules that give you an edge are gone. Your parasympathetic nervous system (PNS) has triggered and taken over your trading mind. You are in fight/flight. You are either trying to avoid short-term loss of capital (life) or you are using aggression to attack the source of a threat from the unknown. When the smoke clears, you wonder what happened. You knew what to do, but you could not do it under the pressure of risking capital. You really could have lost that money if you had risked it. Or if the fight/flight hijacking occurred during trade management – and the trade was going against you – you may have aggressively thrown more money at a losing position in a fight to get back what was being taken from you.
It happened so fast. In the heat of the moment, it seemed like the right thing to do. But now that the situation has passed and you have cooled down, you discover (yet again) your emotions have betrayed you. You did exactly the opposite of what you should have done if you had reacted rationally. This is the collision between the interests of your emotional brain with its emphasis on short-term survival and your logical mind that seeks an advantage in probable outcomes.
Think about this hijacking from the perspective of the emotional survival brain. You survived. Either by avoidance or aggression, the emotional brain’s response to the threat to survival kept you alive for another moment. That is exactly what it is supposed to do. The problem is that it cannot tell the difference between a biological threat to the organism and mere psychological discomfort when exposed to uncertainty.
This is the gap that traders don’t know how to bridge. They don’t see it to know they need to bridge it. And until they can learn to see out of something other than fear (trading not to lose, trading to win, trading to be right), they will be blind to the perceptual trap that keeps shooting them in the foot.
Calming an Old Brain and Creating a New Mind
As long as the trader chooses to deny the fear, the self-limiting belief can never be excavated and brought into the light of awareness. Traders have to learn emotional regulation skills or the emotion stays so reactive that the mind is hijacked as an adaptive response to uncertainty and not knowing. It is in regulating the emotion that the trader can get to the door of the mind. It is here that that he or she gets to examine the beliefs and biases lurking behind the emotion.
For the courageous trader this is where trading offers a unique opportunity. The health of your trading account is a direct measure of the beliefs you are projecting upon market information. If it is growing, the trader is demonstrating a set of beliefs that allow the trader to extract capital out of the markets. If it is stagnant or shrinking, your trading account is a direct measure of the self-limiting beliefs that drive your trading performances. Either way, your beliefs about your capacity to manage uncertainty are being revealed by your trading account, if you are willing to listen to it.
It is also here that you discover that the mind you brought to trading is not going to be the mind that brings success in trading. The mind you brought to trading was built to control its environment and outcome and to avoid uncertainty. And the mind that you need for trading is one that discards the illusion of control over short-term outcome and embraces the uncertainty of the unknown. Instead of trying to control the environment and outcome, the trader teaches the brain/mind to control the mind that he or she brings into the moment of performance. In regulating emotion, the trader has learned to turn off the life-or-death switch of the fight/flight response and build a mind comfortable with psychological discomfort.
This is the key. When uncertainty no longer means biological threat, a new mind based on probability can be designed to deal with uncertainty. This is what the elite trader has learned to do. When biological fear is taken off line, the trader can act from psychological concern. Here, emotions are no longer hijacking the trading mind. The trading mind is focused on performance in the moment, which gives the trader an edge in probability. This is enough.
This evolution does not happen by itself. The trader can be a partner in the design of a new mind built for trading. Or he/she can resist the needed change. But knowledge will never be enough. At the highest levels of performance, everybody has the knowledge. The elite trader has learned how to shift his/her understanding of uncertainty so that it no longer triggers the brain/mind to fight/flight response. The elite trader has taught the brain to “believe” in probability. And that “belief” is grounded by growth in his or her trading account.
It is not easy and it takes work. But it beats the alternative. Either way, your trading account will reveal what you need in order to become an elite trader.