Breaking the Power of Self-Limiting Patterns that Sabotage Your Trading Performance

What happens when a trader learns to manage his emotions so that he or she is no longer emotive-reactive and is not blowing up at inopportune times? Is the job of trader self-development complete? Or is there more? Managing emotions is essential, and doing so opens the door that leads to the trader’s beliefs that are projected onto the world of information called the markets. This is where success, stagnation, or failure is created.

When emotions are calmed, a whole new world opens to allow you to understand how your mind works to your advantage (or your disadvantage) in trading. The opportunity now beckons you to understand how “you” are constructing your sense of the world from an internal map – a map that you never knew blinded you to other ways of seeing and interpreting the world of information in which you swim. That blindness, or that vision, closes or opens the possibilities you see and act upon (or do not act upon) in your trading environment every day.

A True Story of Two Traders

Two traders sit side by side at a hedge fund. They both are well trained to trade the same methodology, the same markets. They use the same feeds, the same indicators, and the same levels, and are close friends – everything is the same except the mind that they bring to trading. And both are professional traders with years of experience under their belts. Yet one is a much more profitable trader than the other. The other is always struggling to hit the benchmark standards that his firm uses to measure performance. The profitable trader receives bonuses for his exceptional performance.

What gives, what’s the difference? The difference is the beliefs they observe the market information through and the mind they bring to the management of uncertainty. Both believe they are being objective in their market analysis and trade execution. Yet, they “see” and act on different possibilities from one another. But the gap between their profitability beckons us to question what each means by “objectivity”.

One trader (the less profitable one) believes that there is an objective world “out there” that, while being rational without emotion, can be quantified, known, and predicted. This is the world that he, and most of the modern world, inherited from Newton and Descartes called the Rationalistic Tradition. Newton gave us the notion that we live in a predictable world that can be anticipated and the outcome controlled. Descartes gave us the supremacy of thinking over emotion in his famous declaration, “I think, therefore I am.” This led to the separation of emotion from thought and the supremacy of reason, which much later led to the trader pop psychology notion of “trading without emotions” (which, in fact, is impossible). This trader is in good company, but the problem is that he is not as consistently profitable as the trader who sits beside him.

And here’s the blindness that does not allow the less profitable trader to see his blindness. What if “being objective” is simply being emotionally subjective without knowing it? Therefore, he is making emotionally based decisions without being aware that he is doing so. (Hold on to that possibility as you read on.) And the other trader(the more profitable one) believes there is a potential world that needs to be observed from an objective state of mind (where objective is a useful emotional state to produce a particular quality of thinking and not the absence of emotion) that will better equip him for what the trade may do. In essence, one is attempting to predict outcome, whereas the other is recognizing that outcome is beyond his control and that the only thing he can, in fact, control is the mind he brings to the performance of trade execution. If he does that, then he has probability on his side. Meanwhile, his less profitable partner is trying to control outcome.

All Thinking is Emotional and Observer State Dependent

What we have here is a collision between paradigms. There is a paradigm of reason and prediction inherited from Newton and Descartes, where the reward centers in the brain light up like Christmas trees when a sense of certainty and prediction is achieved. (The brain is biased to seek this.) And there is a paradigm of a quantum world where everything exists as potential until that potential becomes real when it is observed through a set of beliefs (the lens you see though). In this world there is no certainty – only probability. In a well known experiment in this world, light can show up as either a particle or a wave of energy, depending on what the observer of the light is looking to see (i.e. is biased to see). Prediction falls apart and the reward centers of the brain remain inactive while the brain deals with uncertainty that it cannot tame, creating unacknowledged distress.

The conflict between the biological need for certainty as a survival strategy and the acknowledged reality of trading in an uncertain world where nothing can be known for sure creates a dialectic tension in the mind that is brought to trading. When each of the traders mentioned above studies the markets through their set of eyes, they each see different potentialities based on the beliefs that they bring to the act of observing market information. Both believe they are being objective in their analysis. But one believes that he is a rational self without emotion, analyzing data “out there”, while the other believes that he is an emotional self using the emotion called “rational” to attempt to manage probability to his advantage. Do you see the difference here?

Notice that one believes that reason is outside of emotion, and that, consequently, better thinking results by knowing “things”, so results are deterministic. The other believes that emotion and thinking are inseparable. And that he manages the emotion from which thinking arises (thinking is not independent of emotion). Consequently, he does not fall into the trap of using rationalism (as Newton and Descartes espoused) as a means of avoiding the inherent discomfort of managing uncertainty.

Remember in Newton’s and Descartes’ paradigm, outcome was predictable based on the ascent of reason over emotion. The quantum paradigm assumes outcome is uncertain and performance is governed by the mind that the trader brings to the management of the uncertainty – not the uncertainty itself. The results in the more successful trader’s account demonstrate that this emotionally dependent form of thinking is superior to the assumption that thinking and emotion can arbitrarily be separated from one another. Thinking and emotion are intertwined, whether the trader acknowledges this biological fact or not. The thinking mind creates an explanation for what the emotional mind decides. This has everything to do with the management of uncertainty in trading success. And the trading account is the final measure.

Beliefs + Emotion = Observer of Perceived Reality in the Moment

Let’s step back for a moment and rethink the situation. Imagine these two traders sitting side by side. This time we are going to step out of the deterministic mindset derived from rationalism (i.e. there’s an object out there that can be dispassionately described, known, and the outcome determined) and move to a quantum paradigm where what the trader sees in the markets is based on what he believes about his capacity to manage uncertainty and the emotion associated with that belief. In the second case, there is no determined outcome that can be predicted. There is only potentiality of outcome defined by the act of observation.

What emotional state and associated belief is each trader bringing to the act of observing and action? Here is where it gets interesting. Beneath the exterior show of logic and reason, the less profitable trader has a fear (not acknowledged) that he may lose his profit in a trade if he lets the trade ride too long. In his mind, the more it lets the trade ride, the more danger there is that he could lose his profit. Just because he does not acknowledge his fear’s existence as part of the mind he brings to assessing the markets does not mean that the emotion of fear and his belief that he could lose his profits is not interacting (and creating) his perception of the markets. In effect, he is hiding from his fear based belief through rationalization – where he can pretend the fear does not exist.

He sees through the unacknowledged fear of missing out on profits (his emotional brain) which causes his thinking brain to produce an explanation that supports his decision to take profits early. Thinking follows emotion. Or as we said earlier, all thinking is emotional state dependent. He has himself convinced that he is being rational (without emotion) in his timing for profit taking, but he has not deceived his trading account. It shows that he is missing out on taking larger profits. And the trading firm he works for finally forced him to see what he was unwilling to see. He was observing the markets from a fearful observer state, and the results in his trading performance demonstrated this, despite his very rational explanations. He was trading not to lose profits (control outcome) rather than controlling his performance.

He thought he was trading without emotion from a position of reason and could not understand why his performance extracted less capital from the markets than his trading partner’s. His beliefs did not square up with his performance as measured by his trading account. His trading account reflected how effective (or not) his actual performance beliefs were in his capacity to manage uncertainty. What he declared his beliefs to be did not jive with the health of his trading account – which his trading firm held as the black and white barometer of the effectiveness of his actual trading beliefs.

Surrendering to the Uncertainty of Outcome

Eventually this trader had to come to the moment of surrendering his well-crafted explanation of controlling profit outcome. He had to learn to observe emotion. In particular he had to learn how to observe the fear he had been hiding from behind a mask of reason and logic. He had to surrender his cherished need to control outcome.

To do that, he learned to calm the biological impulse to seek certainty, burned into his DNA over millions of years. He also had to surrender his need to control what he learned in his formative years while growing in a scarcity minded farm family. In this early imprinting period his family always feared what might happen in the future. There was always scarcity lurking around the corner. And he vowed to himself way back then that, when he grew up, he would be in control. This primal emotional adaptation to circumstance had been useful until he got into trading. Now it was a liability.

To move beyond this need to control outcome, he now needed to surrender his need to control outcome and relearn what he could control – his performance of execution. That is exactly what the more profitable trader had learned before him. Focused on the performance of execution, fear of outcome was not present. With training and development of his trading mind, he also came to believe he could control his performance. Now the emotion and beliefs of performance produced a very different observer of market information. His trading mind was consistent with a higher level of performance that led to enhanced profits.

He was observing potential and probability rather than deceiving himself that he could predict and control outcome. This is the quantum leap from Newton and Descartes, where the world is based on logic and reason to a quantum understanding of the world based on Einstein (all is energy), Schrödinger (an observer created world), and Heisenberg (uncertainty principle). Welcome to the quantum world of trading. And what observer (beliefs + emotion) are you going to bring to the management of uncertainty? The answer will be demonstrated in your trading account, the black and white barometer of the beliefs you are projecting onto the markets.

To learn more from Rande, be sure to check out some of his other articles at TradersStateofMind.com.