Rande Howell

Very few people come equipped psychologically to produce success in trading. Though psychology takes much of the blame, much of the problem is rooted in biology rooted in our evolutionary past. We are possessed to believe that we can control outcome and be right. We also avoid uncertainty. These are biological biases that become the psychology we experience the markets through. So traders try to control what can't be controlled and, in doing so, lose sight of what they can control in trading -- the mind they bring to performance. As long as traders insist on being right or in control, they will always give their money over time to wiser participants. Rande Howell http://www.mytradersstateofmind.com

This is really a reply to SIUYA's comments about the military. There is a good book :HOW WE KNOW that directs itself toward seeing how instinctual intuition and reason can work together in decision making under pressure. Intuition is defined as unconscious pattern recognition that operating outside of knowledge derived by reason Well anyway, that's the way I define it in my work. In combat situations often there is no time to deliberate about decisions. Gut instinct has been found to fill in the gaps that reason can't get at. And they teach intuition as part of decision making. It is this knowing without knowing how you know. I study the military because of their interest in peak performance under the stress of the battlefield and they have a lot of money and very smart minds to produce performance under pressure. Much better than most of the academic research. Traders are taught to use reason and logic as their guides in decision making -- and leave emotion out of the picture -- which BTW is impossible to do. Yet, when you get around really skillful traders, you will find that they typically use gut instinct or intuition as part of their calculus of decision making. Very few things in trading are clear cut black and white knowledge that reason, alone, can work well.. It is in this grey ambiguity that skillful traders use intuition to fill in. It's not guessing. It is instinctual problem solving that by passes logic. Same thing the US military is teaching these days. There are a couple of professional traders I work with who teach a very logic based decision making process. Just what you would expect. Yet, in their trading rules under the pressure of living trading, they drive their students nuts when they take trades that don't follow the rules that the students know. The expert trader retorts that they are following the rules. In hindsight, they are. In the moment to the untrained eye, they aren't. Instead of turning a blind eye toward intuition, they are learned how to incorporate it into their very successful decision making. Unfortunately for floor traders becoming screen traders, the gut instincts that they learned on the floor are useless when they can't feel the emotions of decision makers around them. To be successful, they have to relearn how to use their intuition in a different domain. Reason and instinct really need to be taught how to work together in a trader's mind. The video and article I'm preparing for April addresses this gap in understanding trader's mind. The problem is that reason appears to be reasonable until it is put to the test. Then you find that it is slave to emotion. Without really learning how to work with your instinctual emotional nature, traders typically trade with half a brain and limited capacity to act under conditions of uncertainty. SIUYA -- I am going to be speaking in Brisbane and the Gold Coast in May at the national conference for the Australian Technical Analysis Association. I will also be in Sydney for a few days following the conference. Are you in any of those locations? Rande Howell

Personally, I find the biggest gap to competence in trading is the movement from a deterministic mindset to a probability based mindset. It's huge and difficult to make that shift. Rande Howell

That's a surprise. If you go to u-tube and type in Rande Howell, you'll find about 35 more videos on Trader Psychology over the years. They are not as coat and tie as the Money Show ones. Rande Howell

I've know very few people who can maintain a disciplined mindset that is totally focused for extended periods of time. Brain's need for glucose replenishment is real for being focused and alert. Traders I work with seem to be able to maintain focus for somewhere between 30 minutes to 1.5 hours at a time. Then breaks are needed to refuel. Scheduling breaks gives the trader time for his brain and mind to replenish and prepare for another high concentration period. Otherwise thinking quality is compromised. Rande

There entire compensation package is built around short term success or failure. Consistently profitable traders do not get the same bonuses are the home run hitters, though they out perform them in the longer term. It like they know they need to think long term, but the entire culture is stacked to act in the short term. Traders and pm's burn out early so you see young people in these positions. It's a self selecting breed. John Coats, a nuero-scientist who studies the financial markets, has studied and written about this extensively. Currently I'm brought in for 2 hour trainings. I see a mix of traders, portfolio managers, and fund managers. It is the fund managers and portfolio managers that are most open to my message. Thank you for your kind remarks. Trading is a remarkable laboratory for me. The process of trading cuts to the bone like in no other endeavor I've seen. The trading account is a pure measure of the beliefs that the trader is projecting upon the markets. Self honesty is required for the building of long term success. Rande

The firm is highly competitive and is known on Wall St to recruit traders and pm's with a take no prisoners, dog-eat-dog attitude that is the backbone of the firm. They also behave this way internally. This was the first time they had allowed a peak performance guy to train personnel. They also have a high burn out rate even for Wall St. The head trader was not open to my message, but the portfolio managers were. The pm's stay around a lot longer. This firm was over the edge, but all the firms I did training for held an attitude that they expected to win ever day. It was so different from the trainings I've done in Asia and Europe, where there was an acknowledgment that that notion is not workable. It was just striking to me that there could be so much difference between cultures. The Americans were much more like the Chinese than the other financial cultures I worked with in this must win attitude. I've never worked with Australian financial firms so I have no basis to compare there. Rande

Think about what the trader was attempting to do with all that oc behavior -- trying to better control outcome. To a successful trader, all the "stuff" appears to be a disorganized mind. To the trader not willing to embrace the unknown, it seems logical and helps him "feel" in control.. He becomes locked into a particular way of dealing with the uncertainty that had worked in another time and place -- and now it doesn't. But the pattern is locked now. All biological systems organize themselves to avoid the introduction of the chaotic unknown. Our cells have semi-permeable membranes to negotiate the world beyond its closed system. Learning to open that system for growth is a challenge. So it is with trading. There will be many people who never transition from a deterministic mindset to a probability based mindset. These people really need to find a way to make a living more consistent with their mindsets. Trading requires a probability based mindset so that the unknown is simply part of the equation. Rande Howell:crap:

Can't eliminate emotions, mind, or self from trading mind. Except if you are dead. If you've figured out a way to eliminate emotions as part of an organism's dance with the environment, I'm sure neuro-science would be very interested. But you can become the designer of the emotions and mind that you bring into the moment. It's not the absence of emotion that is possible -- it is the management of what emotions are showing up responding to the uncertainty of the unknown. This is what creates the quality of the mind in the midst of the performance. Rande Howell

The organism and the human mind comes to various beliefs about their capacity to manage the uncertainty of the unknown. It is these beliefs that you see played out in the trading drama. Impatience and hesitation are simply expressions of these beliefs. Rande Howell

All this aversion to risk boils down to one thing -- the fear of the unknown. It is both biological through genetic predisposition and psychological in learned reponses in its expression. Trading just makes it impossible to ignore. Rande Howell

This is really an interesting experience you are describing here. Right now, my thinking is that the problem is really about the need to shift from a deterministic mindset where outcome controlled is attempted to probability based mindset (game theory) where the only thing that can be controlled is the mind that is brought into the moment of uncertainty. It is difficult to train. Not because the material is all that difficult, but because the human is so resistant to changing belief pattern. Even though we now know Descartes and Newton had enormous limitations in their theories, in the deterministic paradigm the organism feels a false sense of control that feeds into the brain's tendency toward self-deception. This trumps long term thinking every time. In the probability paradigm (though more honest) triggers the vulnerability of the fear of the unknown.-- and its short term consequences predicted by brain's survival circuitry. It is learning how to accept and work with the vulnerability of the moment -- before outcome is known -- that the trader has to master to be successful. I saw this in trainings I was giving on Wall St. earlier this week. They know their is a high probability of loss on any given trade or position in a given day, but they are taught to win at any cost. They are rewarded and punished based on this criterion. One particular group is taught to believe that they must win every trade. There is also a very high burn out rate or attrition rate in this firm. They also know that if they are right 48% of the time, they will be wealthy. And if they hit 52%, they will become a legend. Yet, they cling to the short term need to win every time -- or create a narrative projecting blame and responsibility outside of the self. Hey, if we can have discussion like this, I'll start publishing here again. Rande Howell

In neuro-science what has been discovered is that you never experience reality, or the markets as a trader. Instead your brain takes data from your sensorial modalities and forms a virtual representation that is projected upon the markets. That is what you "see". You do not see the markets. The virtual simulation is the belief lens through which you interpret the phenomena. You hear utterances from a person and your brain's virtual simulation creates meaning. We did not hear the same thing. History is interpreted by the victors to be right.

OILFXPRO With sufficient motivation and the right set of circumstances, I have seen it done in 2-3 months. More realistic typical times vary from 6 months to a year, depending on the person. People who insist on being in control of outcome or not making a mistake -- never. I have found that it takes about 3-4 months of concentrated work to break the pattern of deterministic thinking and embrace probability thinking. Great improvement is show in this moment, but this new way of perceiving has to be habituated as the new norm. That takes awhile. It the difference between becoming profitable and consistently extracting capital from the markets. Most people don't like hearing that, but that is what I find with the methodology I teach. I have found that managing the physicality of emotion has to be taught first or the mind is too easily overwhelmed by its nature reaction to uncertainty. Then, a tool for re-understanding the mind is introduced -- mindfulness. It is here that a trader can look at his biases and restructure them. Rande Howell

I've worked with a number of former successful pit traders who move to screen trading, and they fail miserably. Competence in the pit does not translate to competence when the trader does not get to smell and see the emotions of others in the raw. What's your take on this? Rande Howell

It is really hard to observe the self because we adapt not to see what is right in front of the face, even avoid it. I describe the mind as a committee that runs the corporation called "you". The first problem is that the chairman of that committee has been asleep at the wheel. And as he wakes up, he discovers that the committee is a mess and in mutiny. First he has to understand the forces at work in that committee. I use a structure that defines the different players, or forces, that constitute mind. This helps traders make sense of the internal struggles that go on in mind as it attempts to manage uncertainty. It does take some work and change. But it does give the trader a way of understanding his/her psychology that opens the door to self development. Rande Howell

"If" is a pretty big word. IF traders followed their rules in the heat of the moment, there would be many more profitable traders. The system is usually the least of the problem in trading, it's the space between the ears that causes the system to have problems. Until this is corrected, it really doesn't matter how robust the system is from my experience in working with traders. Rande Howell

I certainly find that the beliefs behind the management of uncertainty are pointed out in stark relief in live trading. That is when the trader engages uncertainty rather than the illusion of control. Beliefs are the lens of perception we interpret through. They are always there. They are not noticed, however, until there is no other choice but to discern them. My quip about this is: Do you want to be right, or do you want to be effective? Rande Howell

What I hold traders accountable to regarding their beliefs is the impact they are having on their trading account. No matter how dear the beliefs are, the only effective ones are those that have positive impact on trading account. Sounds like this guy needs to evaluate beliefs to the same standards. If he refuses to alter believe based on performance, then his investment in those beliefs are self justifying and he needs to suffer more until he is ready to change -- or leave trading. Rande Howell

I don't know the truth without greater investigation but... I have a guess based on pattern creation and maintenance. I see this one a good bit in my practice. We humans see based on our adaptation to circumstance particularly to meaning derived from attachment objects. The self limiting beliefs are usually formed there. This is the way scarcity thinking is set up. We learn to fail by learning our limitations while making mistakes and getting feedback during our formative period. We learn not see opportunity and we learn to prove we are incapable of risking and winning as we inherent the myths of generations past. It gets past down like this for generations. Many of my clients end up having to de-tether themselves from the perceptual map they learned from historical adaptation before they can create a more functional narrative about their capacity to manage uncertainty. It is one of the more frustrating parts of working with retail traders. It is also one of the most rewarding. Good luck. Rande Howell

You’re a reasonable person, right? And not stupid either – no one could pull the wool over your eyes easily. You work hard at becoming a better trader, think logically about problem solving, and are ready to address any gaps you have in your performance that are holding you back from becoming a professional trader (one that is generating a sustainable and abundant lifestyle), right? If this is true, then what is holding you back from the success you know is possible in your trading? The hard work, the motivation, the mental focus, and the willingness to learn SHOULD open the door to success based on your rational and unfettered calculations. Thinking from an assumption of rational detachment, this SHOULD give you the edge. But it doesn’t, even if you are doing everything right. That much is verifiable based on the health of your trading account – not by the story you keep telling yourself about your trading. BUT, rational evaluation SHOULD give you insight into solving the problem. Yet, another year passes and the pattern of choking in your trading performance still stays stubbornly in place. What gives? What if there were a blind spot in your exquisite mind that blinds you from seeing the problem that keeps you stuck in your current level of competency in trading? Essentially a blind spot in your cognitive perception that keeps you blind to what you are blind to. Well, there is. And what I ask you to notice, as you read this article, is how you analyze the information that is brought forth and what conclusions you draw about this information, me , your approach to trading as a logical and rational human being, and the status of your trading. Blind Spots in Perception Are the Norm – They Just Don’t Seem That Way to the Rational Mind. Mental (or psychological) blind spots are similar to their cousins – physical blind spots. Successfully driving a car requires that you anticipate where these blind spots are, or there will be trouble. Just about everybody knows about the blind spot that occurs when a driver is looking at his driver’s side rear view mirror. It only takes a few close calls for you to anticipate that you cannot see other vehicles in your mirror’s blind spot – and you compensate by either looking over your shoulder before changing lanes or have a concave mirror that expands the observable area accessed by the rear view mirror. That’s a physical blind spot that every driver (hopefully) learns to compensate for – or else. Human beings also have biological blind spots in their biologically derived perception that magicians and card tricksters have been taking advantage of since antiquity. The “sleight of hand” of the card shark is simply taking advantage of gaps in our evolutionary perceptual map even when the trick is being played out right in front of our eyes. Yet, we remain blind to the trick, even when we are shown how the trick works. So not only do you have physical blind spots and perceptional blind spots built into the very fabric of DNA, there are also cognitive blind spots built into the way the mind processes information and forms conclusions. And these cognitive quirks of our sense of self-preservation dominate our psychology and the world view we stridently hold on to – whether it makes sense or not. Social psychologists call this phenomenon Cognitive Dissonance. And once a person (a trader in particular) is settled into a world view, their perceptual cognitive map refuses to see any explanation that is inconsistent with that viewpoint. This cognitive blind spot is called cognitive dissonance. And it is what keeps many a talented trader from growing into the potential trader he could be. The Need for Self Preservation Gives Rise to Self Justification Human beings, traders included, fall into beliefs that support their need to maintain the integrity of their self image. This need is firmly rooted in the biological mandate to survive. For the sake of self (and biological) preservation, the brain will maintain a particular organization of the Self once it is formed, with single-minded purpose. When the brain becomes the mind, the psychology of the self has to be maintained at all costs. It has to maintain the belief that you are a rational being that can decipher the code of successful trading. And the code is “out there” and not in the psychology of perception. From this detached rational perspective, the trader comes to believe that the answer is “out there”. To take a mirror and look at the current psychological organization of the self for success in trading would be an attack on the integrity of current psychological organization. And since the Self Preservation bias of the brain/mind is on auto-pilot with a bias to be right, it will push aside any information or experience to the contrary. And it will make excuses that justify mistakes. This is how strong the bias to be right is – that it would cast aside evidence that the problem is not “out there” in systems, new gurus, new indicators, or new methodologies. After all, the brain and psychology says, we have a perspective to preserve. (i.e. "I’m a reasonable person, so I must be right.") And it creates an explanation that supports the continuance of the current “rightness” of perspective. So what does the mind do? It self-justifies its behaviors, actions, and beliefs – even if it costs money to do so. Let me give you a couple of examples of how this shows up in a trader’s language that supports his unwillingness to change. These are explanations that I hear ALL THE TIME – they are that common. “Yeah, I know that something is wrong in my trading and that I need to work on myself also. And as soon as I find out what is wrong with my trading, I will start working on myself.” “I’m still learning how to leave my emotions out of trading. Someday, when I finally do that, my trading will take off.” “I know that success is near – I can feel it. If I keep pushing, I know I will break through. I wish it would hurry though, I’m almost out of trading capital and may have to start looking for a job soon.” “I know that the problem is with my psychology, but I can’t afford to spend the money on my self-development. Until my trading improves, I simply can’t afford to work on myself.” “This psychology stuff is a bunch of BS. I was successful before and I will conquer trading also. I just don’t understand why it is taking so long” “All I need to do is to produce a purely mechanical trading system, so that my psychology is a non-starter. In theory I know this is right. All I have to do is build the system.” “I know that psychology is important in trading. I read about it and watch videos, but somehow psychology is not working for me. I’ve read enough to know what the mind needs to look like, but I keep waiting for my psychology to change with the knowledge I have.” “I’m going to eventually get to where my mind is right. I just need to work through it and keep working my system.” “Yeah, yeah, yeah – I know I need to do something about my head. I’m consistently losing money and realize that the problem is me. But I keep putting it off, thinking that things will get better. They have to. I can’t afford to go on like this.” Do you see the self-justification of maintaining losing ways and the need for self-preservation as expressed in the explanations that the traders give? It is so strong that the trader justifies his/her continuance of a limiting pattern despite the pain it is causing. This is typical with MOST TRADERS and it keeps them stuck in their self-limiting (but stable) beliefs. By the way, all of the statements above come from traders who are either losing money or are leaving chunks of potential profits on the table – and have been trading for a number of years. These are not newbies who don’t have the experience to know better. Can you also spot the self-justification that allows the trader to continue their self-limiting ways? Yes or no? (This is important.) You may even find the self-justification narrative that you keep repeating to yourself like a mantra. They don’t see the self-justification that blinds them to continued mediocrity. They are blind to what they are blind to. All of them create a narrative that continues their current self image or self organization, even if it is harming their performance in trading. The very rational and logical mind they believe in is causing them to be short sighted in their evolution as a trader. Yet, the “rational mind” they are using to solve their problems keeps them from seeing the very solution they are looking for. It has become the obstacle to their ability to learn. And they are perplexed by their continued lack-luster performance. But , like a repelling force, they cannot even begin to look at their current organization of self as a large part of the problem. If they did, it would produce the discomfort of dissonance. So, to preserve the integrity of the Self as it is currently organized, they stay stuck in beliefs that consistently show they are ineffective in managing the probabilities of uncertainty found in trading, evidenced by the health of their trading account. This is the self-justification of cognitive dissonance. Learning to See What You Are Blind to In Mindfulness, you learn to step back from your thoughts and beliefs and recognize that they are not you. In fact, you and your thoughts, you and your beliefs – are separate. But the Observer of the Self has fallen asleep and you have fused to your thoughts and beliefs as if they were you. And now through the psychological device of cognitive dissonance, you are blinding yourself to explanations that do not fit into your comfort zone. The first step though this is to notice that your rhetoric and your performance do not match up. Performance follows operating beliefs you hold about your capacity to manage uncertainty. If the desired performance is not there (and you can trade successfully in simulation), then become a detective. The detective knows he is missing a piece of the puzzle. And he is looking for what he cannot currently see. You must become the detective. But you are looking for something (beliefs about the Self) that are so ubiquitous, so familiar, that the belief flies underneath the screen of your radar. As a detective, you know it’s there – you just need to learn how to see what you have not been able to see. As a homework assignment for an awakening inquiring mind, I ask you to explore this question to help you break through the complacency of the self-justification of your cognitive dissonance that keeps you stuck in your trading performances, despite all that you have tried. What are the self- justifications that I use to maintain the status quo of my trading performance (that counter the black-and-white evidence found in my trading account)? And do these self-justifications allow for a current organization of the self that can produce an effective trading performance? You can use the explanations (quotes) I gave above as a starting point. The difference between trading and the rest of your life is that trading will not let you get away with ineffective, but well justified, beliefs. The drawdowns and the ticking clock of time eventually force traders out of their stupor. The key is to learn before you run out of capital or out of time. At the bottom a trader has to decide if he has to be right or if he wants to be effective. Letting go of ‘’being right” is uncomfortable at first. But by choosing to become an effective trader, you become humble enough to appreciate that mistakes were made – and you made them. And now you are going to learn from them, rather than justify the continuance of ineffective beliefs. Rande Howell www.tradersstateofmind.com

That is where training for and exposure to the heat in these moments really has to be a real consideration in the maturation of a non-performing trader to a profitable trader. It takes some work, but it can be done. There a whole part of my training that is focused on this particular aspect. Rande Howell

Great in theory, but putting it into practice with real live human being that don't know and appreciate that under pressure, they will revert back to much more primitive reactive patterns, could prove difficult. This approach is basically used in the professional investing industry. Analysts make recommendations, portfolio managers make entry decisions, traders are given their orders. Then portfolio manages the position until they give orders to the trader to exit the position. They generally are looking at a 2 month horizon in these cases. In China, the average hold time is a mere 2 weeks -- swing trading. Still, the person assuming the risk, sweats. It's very common for the fund manager to manage his positions for the short term to keep his clients and his job, rather than think in the long term. That human thing, confronted by uncertainty, just doesn't care about how rational or impartial you like to believe you are. That's why Emotional Finance is a growing field in the highly competitive field of the investment industry. What I hear from trader trainers I work with in their trading rooms is that the trader/trainer calls the trade that he himself is taking out to his audience. They are supposed to enter. The master himself is entering, so why shouldn't they? 60% don't. They report, "I just missed that one." Really frustrating for the trader/trainer. The same thing happens on trade management. They see the teacher managing the trading, using his rules and understanding of market structure. The students still wiggle emotionally and get out of the trade early. I would love to see how you organize this. What I hear is that you are breaking the risk adversity down into digestible chunks for a group of people to deal with collectively rather than all of it being on one's person's back. Let me know. Rande Howell

OILFXPRO On several occasions I have run across traders that clicked into high gear after learning the emotional regulation portion of my training. They had okay-enough beliefs about their ability to manage uncertainty and they were blessed with a patience that most weren't. They simply did not know how to regulate the primitive emotional circuitry so that they could maintain impartial mind in the midst of pressure. These folks are rare and most have been females. In training the brain/mind for trading in my way of thinking, it is necessary to build in habits of intentionality and vigilance. Our emotional social brain is wired to "have to be right" for survival's sake. It's really more about the avoidance of uncertainty. The problem is that "being right" only gives the trader the illusion of control in the short term. The acceptance of loss runs against this ingrained trait, but it must be developed as part of developing a mind that can trade effectively. This is where practices of intentionality and vigilance really pay off for the trader. I'm skeptical about the reward center part of the brain. Euphoria is dangerous for the trader trying to become consistently profitable. They tend to be brain stem (Reptilian Brain) functions and do not discriminate between external reward (drugs), behavior reward (compulsive behaviors), and internal self generated states. My focus is getting the trader to no get sucked into reward or avoidance stimulation WHILE THEY ARE TRADING. For me, this is dangerous stuff. Reward, be it dopamine or opioids or testosterone, all lead to skewed thinking in the heat of the moment. It is calm, disciplined impartiality that I stress while they are in the performance of trading. After the trade day is over, they can revert back to reward. It's a good thing then. Just not while trading. Rande Howell

What great hard earned observations and questions. I'll give you my responses. Why is it most traders can not follow systems, even though they believe in the system and its profitability? There is a difference between what a trader professes he believes (while not under pressure) and the beliefs that come out in the performance of execution in the heat of the moment. When under stress, people revert to more hardwired responses learned when the brain is laying downs its more primitive programs. So, they are following a system. But its not the system they learned from you. That learning is hijacked under pressure and reverts back to an earlier problem solution based on short term survival interests rather than long term profits. I spend a good bit of time training traders to manage this aspect of performance. Why do traders freeze in the heat of the moment? Rational mind has been hijacked and they go back to primitive impulse when uncertainty (fear of death to the biological organism) is pressed upon them. The brain is wired to presume certainty and therefore determining outcome even when ambiguity is the rule. Jumping to a conclusion, even if its crazy, and being certain again is better than facing the uncertainty. This is your "got to be right" observation. What is the stress response? It is learned. Mostly the experience is over loading the perceptual map of the person and they experience powerlessness when the stress builds to distress. To avoid this, the person "has to be right" until that mindset is overwhelmed. Then they move into fear and panic. And they do the stupid things your traders did. Finding the right people. In your interview process, learn to observe your own biases regarding "what it takes to be successful". Most success mentality is about the urgency to take action, making things happen, and being in control. Once you see these traits in yourself, it is easier to see them in others. These traits may be useful in other endeavors, but they are dangerous in trading. Get people to tell stories about themselves and the way they faced challenges. The story of facing challenges will reveal much about the way they will trade. Conquering narratives would be a good indicator of someone you would not want to invest resources into to produce a successful trading mind. Trading mind is about comfort with uncertainty, not knowing, and letting go of the illusion of control. Rande Howell