Learning to Think Clearly and Calmly in the Heat of the Moment

“Once you know the rules of the game, it’s a matter of managing the pressure of emotion from which the trading mind emerges and performs. And therein, lies the problem and the solution.” – Rande Howell

Drilling Down to the Mind that Performs

What happens when you get sucked into the pressurized act of trading? For many traders, this is their undoing. Whether it’s the urgency to jump into trades that make no sense afterwards, the hesitation of perceived risk of losing at entry, or the powerlessness of managing a trade currently going against you, aspiring traders become unglued in these intense moments (though they know how to trade) and can no longer summon the calm, rational mind that they had before being subjected to the stress of risking capital in real time. They know what to do, but cannot do it when the money counts.

Instead of following their carefully thought out rules while under stress, they fall apart emotionally in the heat of the moment and start thinking (and acting) irrationally. They end up doing stupid things – things they know better than to do. But they don’t seem to know how to stop themselves from getting sucked down the emotional vortex. However, after it’s all over, and they are talking trading to fellow traders, the calm rational mind returns and, with it, their “good senses”. Suddenly, all over again, they realize that they “know” trading (people actually seek them out for advice), but they cannot use that knowledge effectively while under the gun.

Obviously, something is not working in the way the trader is approaching his (or her) trading. But what? Usually, in the vast majority of traders I work with, the problem can be isolated into two main causes that have nothing to do with knowledge of trading. Both have more to do with emotional intelligence (knowing what makes you tick) and the future orientation of goals brought into the performance of trading. This is the mind that the trader brings to the performance of trading.

Emotional Intelligence – What Makes You Tick under Pressure

Enormous evolutionary pressure over eons of time has shaped a human brain/mind that is highly biased toward predicting outcome. The human mind will invent stories that explain why things happen and provide a prediction of outcome – even if there is no good evidence to support the conclusion. This phenomenon is called cognitive dissonance (i.e. do not try to confuse my beliefs with facts to the contrary). Notice that the human brain/mind is biased towards predicting certainty of outcome rather than probability of outcome. Think about it – when facing a serious challenge, would you rather believe that you can prevail in the struggle and believe that is going to be the outcome, even if only through faith alone? Or would you rather believe that you have only a certain probability of successfully managing a life-threatening challenge – even if logic does not support your belief?

In the not-so-distant past, we humans lived in a dangerous world where we were constantly subjected to deeply challenging situations. Uncertainty prevailed, and humans developed a deep fear of uncertainty. Uncertainty, more often than not, meant bad things were about to happen. And humans developed a strategy of avoiding the danger inherent to uncertainty by predicting outcome.

Without a belief they could prevail against or avoid threat, our ancestors would not have survived the enormous odds they faced in their world. Over time, this adaptive response became hardwired into our DNA and thereby became a trait. You can see the hardwired, archetypal nature of this evolutionary outcome in the Indiana Jones movies. In every movie in the series the hero is faced with daunting odds for survival and victory. He moves into these dangerous situations with no realistic plan of action. Rather he is going to make it up as he goes along. And Indiana Jones prevails. Many people land in trading as a new career much the same way. They have no idea of what they are getting into and do not prepare themselves adequately for the pressures of trading.

When you watch one of these movies, it resonates with you and you identify yourself with this trait – even if you know that Indiana Jones is just a fictional character created by Hollywood. The Indiana Jones series was enormously successful because it tapped into a deep archetypal trait burned into our DNA. That trait held that humans (and you) will be successful by willpower, grit, and courage. What is not remembered is the high numbers of causalities in that quest for survival. Though the probability of survival for each individual was low, the advancement of the species was enhanced. Probability was with the species, not the individual. But because a belief in the certainty of survival of the individual was wired into DNA, the individual did not see the odds against him. Again, you can see this bias in the rookie trader.

This success mentality, burned into our ancestral DNA, works well in the macro world of creating and managing a business or career – where sheer willpower and grit overcomes the odds of almost assured destruction, and assures us of victory. It’s the confidence that we can overcome any obstacle that comes our way and know that victory will be ours. This narrative, so well depicted by the Indiana Jones series, resonates with many people (particularly alpha-type people) who come into trading as a second career and believe their willpower and grit will also predict the certainty of success.

Already, you can see that your ancestral biology culturally imprinting on you will work against your development as a trader. Trading is not about predicting outcome with the certainty of belief. It is about the management of probability, where nothing is certain.

The Work of Trading

The immature trader believes that he/she is going to “make things happen” since that is the way he has learned to produce success. And he/she believes that he has to be “doing”, taking action, to make his goals come true. He has set his future financial and personal goals and has to act on them to achieve them. The problem with this orientation is that the focus is on the future, rather than the moment of performance.

The flaw in this thinking is that there is an inherent assumption and belief that by future orientation of goals, the trader can control outcome. And in many endeavors, this strategy really does work. However, time and again, this assumption produces only drawdowns in the trading account. Why?

Just because the trader believes in his heart of hearts that he can control outcome does not mean that, in fact, he can. And with every trade that a trader makes, there is undeniable evidence that the trader cannot control outcome – despite his desire to control it. This new discovery really discombobulates the historical belief structure that the trader brings to trading. And it flies in the face of everything he believes about success. In the confusion, the fear of losing takes over the former “success mind” of the trader.

What can a trader actually control if he cannot control outcome? He can control the mind that he brings to the management of the uncertainty of trading. This is the work of trading. And that mind is not the mind that he has been taught will create success. Nor is it the one that he brought to the challenges of trading, which is dead on arrival when he attempts to make the future happen by concentrating on it.

The mind that works in the challenges of acknowledged uncertainty is the one that is rooted in patient observation. The successful trader, unlike his counterparts in business, lets go of the mind focused on the urgency of action to make things happen. Instead, the successful trader develops the patience of waiting for things to come to him – before acting. Acting is only a small part of the work of trading.

To the successful trader, the work of trading becomes patient observation of the moment, often called the Power of Now. This is the time-slowed-down-time-zone that successful traders inhabit. This is a cultivated mind that is far away from the maddening cries of seizing opportunity. It is this very seizing of opportunity mindset that gets the trader in trouble in the first place.

A calm mind equals a potentially disciplined mind. The trade’rs mind still has to know how to trade, and needs to have the knowledge of trading, BUT a calm mind allows for the discipline needed to carry out a trading plan – nothing more, nothing less.

Evaluating Yourself

Where do you stack up? First, do you have the knowledge of how to trade? Nothing is going to help you if you do not. Many gamblers become traders believing that they can become lucky enough to win without really understanding the game they are playing. The good gamblers depend on this because they are not gambling. They are depending on you to be gambling. It is easier to win money at the Casinos with this mindset than to win consistently at trading. The Casinos have a vested interest in letting you win just enough to keep you hanging on. Trading has no such vampire seeking a continued blood supply.

Second, have you really evaluated your mental skill sets for success in trading? Do you have an urgency to trade (“I’ve got to be actively trading to make money”)? If you do, you are gambling. The good traders are depending on you, just like professional gamblers. This is the way they make their living. This trait has to be unlearned. As long as you bring it into the performance of trading, the patient trader will always be waiting for you at the point of ambush. Your emotional liability while trading will point the finger and your trading account will be the evidence.

Third, and the most important, are you willing to change (really change, rather than talk about change)? Change is going to have to happen if you are to become a successful trader. Most traders really are not willing to do this part. And the consistently profitable traders depend on this bias. This path requires real disruption to your comfort zone and a commitment to getting out of your comfort zone and evolving as a human being who trades. Until this time, self-deception aside, you are gambling with no real edge other than the capital that you thought represented how smart you were (notice the past tense).

This is where every newbie starts. The difference is whether he/she is willing to learn the rules of a very different game than the one he thought he entered.

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