Déjà vu All Over Again
“This happens to me all the time. I’m a profitable trader, but I leave way too much money on the table. Each day I wake up resolved to stick to my trading plan. And I’m fine until I get into the trade. Then something goes haywire, particularly if I’ve already lost one. I get rattled as I watch the trade bounce around. The more I hold on to the trade, the more I feel the pressure build to get out of the trade. Then I don’t know what happens. When I finally see the trade becoming profitable, I’ve come unglued. I just want to get out with the profit I have before I lose it.
I get a jolt of relief when I get out of the roller coaster ride I’ve been on. I’ve got some profit. Then I watch the trade do exactly what it was supposed to do. I see it trend and I realize how much money I left on the table, again. In hindsight, I know in my right mind that I should have stuck to my trading rules, but my right mind just gets blindsided and my fearful mind takes over. I never see this coming. This is the biggest problem I have in trading. If I could get this one licked, I would be a very profitable trader.”
A Strong Will Never Wins Over an Excited Emotional Brain
One of the largest obstacles in a trader’s journey to reach consistent profitability and income is actually learning how to manage his emotional nature once he is in the trade. This is when risk becomes real and palpable. And this is where a trader’s lack of understanding about emotions and thinking becomes the barrier to his growth. To the trader who has not trained his mind to work in this highly charged emotional environment, there is a powerful tendency for him to get ambushed into a fear that paralyzes clear thinking and urges him to take the profit he’s got RIGHT NOW rather than risk the gains that could evaporate if he waits for the trade to further develop. This is despite what (while in a logical state of mind) the rules of his trading plan dictate for his exiting a trade and taking profit.
In this special case of the Fear of Missing Out, the trader has fought through trade entry. And, unprepared for the requirements and skills for psychological management of the mind that he brings to the performance of managing the trade, his will power to force an emotionless mindset in the face of uncertainty is swept away, along with his profit. The problem for the trader is that he does not “see” the fear before it has already undone his capacity to manage a trade from a disciplined and impartial state of mind.
He has just experienced an emotional hijacking of his rational mind (and his will power) by his emotional brain. Trying to steel his emotions in the face of the challenge of risking capital seemed to work – for a while. Then the use of will power in the face of continual exposure to the risk of uncertainty and the negative attribution bias built into the primitive neuro-circuitry of his brain was overwhelmed by millions of years of biological programming that he bumped up against while trying to manage his trade.
What actually happened to his state of mind? Did this hijacking just come out of nowhere? That is the way this trader, and most traders, explain it. They “did not see it coming”. And they do not understand how to change a deeply wired reactive pattern that the emotional brain has already established to avoid uncertainty. In fact, this trader (and most traders) head right into a head-to-head collision between their will power and the force of a powerful emotion that can derail a trader’s thinking in nano-seconds.
The Emotional Brain Makes a Decision: the Thinking Brain Produces an Explanation to Support It
First, let’s start with examining some of our assumptions about the nature of emotions and thinking. Rene Descartes was wrong. The guy who brought us the Rationalistic Tradition by declaring “I think, therefore I am” made a fatal flaw in his understanding of how body, brain, emotion, and mind inter-relate to one another. It was like he attempted to separate the mind from the body (emotion). This error moved through the centuries and became an unexamined assumption at the base of many human endeavors, including western medical and scientific thinking. This thinking held that you could ignore the mind and the beliefs contained there and simply treat the body. Mind and body were separate in this assumption.
Now, of course, with the advent of neuro-biology, a very different paradigm of understanding has emerged. Today the understanding is that the mind (thinking) emerges from emotion. The well-evidenced theory today is that all thinking is emotional-state-dependent. So much for leaving emotions at the door while trading! Without the presence of emotion, you have no thinking. The only question here is what kind of thinking is available to you based on the emotional intelligence of the trader.
The key is managing the emotion that you are bringing to the management of a trade, rather than having the reactive emotion managing the mind that trades. If you go back and read the oh-so-real vignette at the beginning of this article, you can observe that the trader ignored his emotional nature at his own peril, and that by not heeding the presence of emotion, his thinking (when he needed it most) was compromised by fear. The emotion he wanted to be in was impartiality. That emotion produces the clear thinking so treasured by traders managing trades under the stress of uncertainty.
Being ignorant of the way emotions and thinking are linked together, he kept falling into the same trap, again and again. What he saw as “coming out of nowhere” was in fact very observable (and manageable) if he had known what to look for. But first, he had to develop an understanding that allowed him to see emotion in a very different way. By doing this, he would be able to see his reactive pattern in a new light.
Emotions Are Biological – They Take Over Psychology
By the time the trader in the beginning vignette noticed the psychology he was trading from, he had already compromised his capacity to manage the uncertainty and ambiguity of the trade in process. He was not prepared because he did not know what to look for. What he missed were the tell-tale signs of the emotion arising and turning into a force that took over the mind that was supposed to be trading from a disciplined and impartial state of mind.
Because emotions are biological, there are physiological changes that start occurring as the triggering of an emotion ramps the body and brain up for action. (That action, in this case, is getting out of the trade early.) This “ramping up” of the emotion is called arousal and is much like a dragster gunning his engine in preparation for accelerating down the drag strip. Emotional arousal has a biological signature associated with it that can be observed. In this trader’s case of the Fear of Missing Out of Profits, his breathing would have either stopped, or become rapid and shallow. His muscles in specific areas of his body would also begin tensing. In addition, his heart rate would have accelerated anticipating a call to action so that a threat could be avoided.
Unfortunately, the trader had not developed the Mindfulness needed in order to be aware of the building up of the emotion before the chemistry of that emotion began flooding into his body and brain. This is analogous to the dragster not gunning his car in preparation for the run, but just racing down the drag strip. In the case of the emotional build up with our trader friend, the emotion has hit a threshold that flips a switch and the emotion is propelling the trader into reactive avoidant action.
Yet, with training and practice, he can develop the Mindfulness to be vigilant about the avoidant pattern (avoidance of loss) that is wired into his adaptive response to the management of uncertainty. By intentionally altering his breathing and relaxing his muscles, he could have managed the intensity of the emotion so that it would not have taken over his mind (hijacked his mind) as he attempted to manage the trade.
Notice here that the trader becomes an emotionally intelligent Observer of his body as part of an emotion. This is critical because the emotion dictates the kind of thinking that the trader brings to the management of the trade. It also allows him to face what he has been avoiding.
Beliefs Become Embedded Into Emotion
Ultimately, by managing emotion so that it does not hijack thinking, the trader is able to approach his beliefs about his capacity to manage uncertainty. It is these beliefs that generate the results in his trading account. It is also these beliefs that the trader has been avoiding because they cause such discomfort when brought into awareness.
This is called “facing your dragons”. Ignoring the dragon gives it enormous power over your life. Pretending that you can use positive thinking or affirmations to make the dragon simply go away is very simplistic. Ultimately, the dragon must be faced.
The “belief dragon” does seem real. But it is only an assumption that has been embedded into the neuro-circuitry of your brain’s programs and has taken on the force of belief. It feels real because it has become habituated and has become the fulcrum around which your sense of self has been forged. What is being exposed in this trader’s performance is his belief about his inadequacy to manage uncertainty.
And until this “belief dragon” is challenged, deconstructed and re-organized, the dragon will have emotional power over the trader’s performance under the stress of managing his trade. Notice that this begins by managing the emotion so that it no longer has the power to overwhelm. It is at this point that the trader can step back from both the emotion and the belief and recognize that beliefs and the emotions in which they are embedded can be re-organized into higher functioning states of mind.
Instead of avoiding the discomfort of the emotion, the emotionally intelligent trader recognizes that the structure of the emotion is his teacher. The fear teaches you to seek out the self-limiting belief that keeps you from achieving your greater potential. Getting equipped for this kind of work opens the door so that you can use your fears and impulses as guideposts in your journey towards becoming a professional trader.
The trader re-engineers his beliefs (about his capacity to manage uncertainty) from beliefs that seek a certainty of outcome (fear based) to a mind that manages and accepts the uncertain probability of outcome (probability based). Then, trade management arises from a mind that lets go of the need to control outcome. Transformed, the mind that the trader brings to the trade is centered on the management of probability. This trained mind is anchored in disciplined impartiality, which is built to manage probability. The trader becomes the manager of the emotional state that he brings to the performance of managing the trade, rather than its victim.
To learn more from Rande, be sure to check out some of his other articles at TradersStateofMind.com.