Developing Peak Performance Trader Psychology

[Rande Howell 10]

“We create the possibility of our future based on the way we interpret our world. Becoming a new observer of our world opens the door to new ways of being in the world.”

 

Between the Crosshairs of Emotion and Trading

 

Hesitation gripped Jack’s tensed hand. He couldn’t decide when to enter this trade. His trading plan said he had really gone past the entry point he should have taken. But he had hesitated – what if he was wrong? He decided to wait and track it just a little longer – just to be safe. This was the story of his trading life – waiting on the sideline frozen by his fear of uncertainty. “If I stay on the sideline, I’ll be safe,” he consoled himself. He watched the price go higher and higher. Still he hesitated. Ex-banker that he was – he wanted to be sure.

 

But as he hesitated on the sideline pondering this trade, Jack also began to fear he was missing out on a profitable trade – he wanted in. He felt the urgency build. “Just a little more proof”, his tentative side whispered in his ear. “Get in this trade before it’s too late!” urged another impulse, “Sitting on the sideline isn’t getting you anywhere. You’ve got to get in to win.”

 

This internal struggle in Jack’s mind escalated. Finally, to prove he had the courage to face his fears, he jumped in. The impulse to get in on the trade finally trumped his fear of uncertainty. In a matter of moments, however, the price began to tank and hit his stop. Because of his hesitation, Jack bought beyond the higher end of his entry range. He had missed the opportunity of profit. Instead, he took a small loss. Hesitation was fatal.

 

Why Jack Can’t Trade

 

An emotional roller coaster ride is not what Jack imagined trading was going to be like. Before he started investing in trader training, he studied the opportunity. With his deep institutional investing experience, Jack reasoned active trading was a skill set that he could learn and develop successfully. It was going to require practice and training – he was prepared for that.

 

What he was not prepared for, however, was the role emotions play in trading – and the need to manage them. None of this was mentioned, or he did not hear it, before he committed himself to learning how to trade. No one told him that 90% of trading was in his head – putting himself literally on the line really fired up his stress level. After investing in a solid trading system and training to develop a methodology and trading plan, he was finding that he had a difficult time sticking to and executing his trading plan.

 

And, it was the moment that he moved from simulation trading to having his money in the game that things changed. After all, this was his money he was risking now! In this new world, he seemed to be pulled emotionally in various directions at once. Fear and self doubt collided with a child-like impulsivity that left Jack stressed out and making poor trading decisions.

 

Jack had spent a lifetime pushing emotions away like a nuisance. Now he felt emotional chaos and did not know how to get it under control. Whether it was getting into a trade or getting out of a trade, Jack was often confounded by a mixture of self doubt fueled by his fear of uncertainty or impulsiveness egged on by his fear of missing out. Caught in the crosshairs of these two emotional positions, his winning percentage was dismal. What he knew is that if he did not get a handle on his emotional nature soon, his trading account was not going to survive his learning curve.

 

Thinking Hijacked by Fear

 

A trader’s emotional state determines how he will interpret the market and what he sees as possible in the market. This is because all thinking is emotional state dependent. What does this mean for the trader? Everything – because we trade our psychology. And emotion drives psychology.

 

In the example above, Jack was being pulled in different directions by competing fears. Initially his thinking was contaminated by a fear of uncertainty that kept him tentatively on the sidelines of trading. As he sat out watching the price climb, a fear of missing out on a profitable trade fueled an impulsive entry into a trade. And with no understanding of how to manage them, he sabotaged his trading plan and himself.

 

Without a capacity to manage his emotional states, Jack’s thinking historically fell into self doubt and caution. When he was in the corporate world, this was never a problem. He was always able to steer clear of having to deal with the messiness of having to deal with emotions. In business, there was little need for introspection and he could always hold other peoples’ behavior responsible for the way he felt.

 

It did not work this way in trading. There was no one responsible for his trading but Jack. In taking full responsibility for his trading successes and failures, he discovered that he had developed a habit of avoiding emotional discomfort. The breakdown for Jack, and many traders, is that there is no room to avoid the fears and self doubt in trading. They had to be dealt with head on – a talent he had never developed. Its time had come.

 

Distinguishing Biological Fear from Psychological Discomfort

 

To help him identify and resolve issues that affected his trading performance, Jack found a trading coach. By taking responsibility for his profitability, Jack came to recognize that he could develop himself into the trader he needed to be. The first thing that he learned to do was to separate biological fear from psychological discomfort. This is critical.

 

The brain cannot distinguish between a real threat to life and psychological distress. Jack’s biological fight-or-flight system had been triggering him to avoid risk because the body interprets all risk as a threat to life. His brain’s hardwired motivation to avoid uncertainty (biological risk) put Jack on the sideline. But risking capital is not a biological threat – it does produce psychological discomfort though.

 

When we are faced with the trials and tribulations found in life (particularly trading), our motivation needs to shift from avoidance of the threat for short term gain (biological fear) to approaching the source of the discomfort (it is not going to kill and eat us) in an emotional state of calmness, curiosity, and impartialness. It is in these emotional states that we become capable of long term problem solving.

 

By learning how to calm his body and mind down so that fear did not sweep his thinking into negative appraisal and catastrophic thinking, Jack was able to learn how to take biological fear (and its avoidance motivation) off line before it swept him into reactive behavior. And he was able to replace it with the confidence of a risk manager. A risk manager knows that there will be losses – but there will also be a higher ratio of gains. His job was to reasonably manage risk over a larger number of trades. He had to develop a longer term view rather than a biologically driven, emotional, and short-term knee-jerk reaction to risk.

 

Before, Jack placed life or death significance on each and every trade. With training he was using his psychological discomfort as a reminder that he needed to trade from a calm and impartial state of mind. His ability to take a step back from his automatic fear response into a calm state of mind allowed him to develop the qualities of a successful trader. Freed from habitual triggering to fear and dread allowed him to access inner resources within himself. By cultivating these aspects of his psychology, Jack developed his inner game of trading to a new level.

 

Creating and Managing Peak Performance States of Mind

 

He now mentally rehearsed his trading day, rather than just allowing it to hit him with full force. He used breathing and relaxation to calm his body and mind so that accessing calmness, discipline, patience, courage, and impartialness became a possibility – he achieved emotional state management. And with a disciplined daily practice of keeping the body and mind calm and mental rehearsal of calm assertive states of mind, he was prepared for the trading day. His inner game was in the zone.

 

Developing this part of his inner game of trading led him deeper into his ability to manage his emotions and his states of mind – and it positively impacted many other areas of his life. He had come a long way from being stuck on the sidelines by his fear of uncertainty and then impulsively entering trades out of a fear of missing out. Jack’s decision to take responsibility for his states of mind and to learn to manage them created a very different trader. As a result a very different psychology of the self was deciding when to enter and exit trades – calm, relaxed, impartial states of mind rather states of mind rooted in fear.

 

J. Rande Howell, MEd, LPC

http://www.tradersstateofmind.com