Everyone has seen it happen. Something breaks, and even seasoned traders begin to crumble and throw everything away in the heat of trading. You’ve probably experienced it yourself more than once. Retail traders and professional traders often follow different paths to the downfall of their highly trained minds. But on the profit and loss (P&L) statement of both, the result appears in the red.
The retail trader typically enters the trading world with a low tolerance for capital risk, manifesting as a need for control over the outcome, and firmly believes that superior knowledge is all they need to win. Meanwhile, the professional trader, sooner or later, falls into the trap of excessive, euphoric confidence, irrational exuberance, and mismanages risk until it hits them hard. Once the euphoria is crushed by serious, threatening consequences, the memory of those losses begins to influence their calculations when opening positions. It’s difficult to shake off that feeling once the trauma of losses becomes real. In any case, both the retail and professional trader end up with their minds compromised precisely when they most need to perform at their peak.This cycle is a never-ending story for both Main Street and Wall Street traders. At least until the trader begins to grasp the “mental game” inherent in trading. It is this inner game of trading that separates the wheat from the chaff: mere knowledge versus proven knowledge; that is, the ability to act calmly under pressure. And the ability to resist both the irrational pessimism of fear and the excessive confidence and irrational exuberance of euphoria.
This need to manage emotional states is precisely what we examined in last month’s article: The Emotions of Money and Loss. It addressed the need to calm, or regulate, emotions before they can compromise a trader’s mindset. Once the mind has been hijacked by emotions, it’s too late; the damage is already done. But suppose you have learned to regulate your emotions in such a way that you are not drawn into the vortex of irrational pessimism or irrational exuberance, the two horsemen of the trading apocalypse; what happens then?
The Conflicted Mind You Never Imagined Having
Suppose you have managed to calm your emotions. What does that achieve? It brings you to the doorway of the mind. This is where you need to step back for a moment and ask yourself the question: “What is the mind, after all?” Most likely, your perception is that the mind is the place where “your” thoughts exist. Only “you” and “your” thoughts. How could it be more complicated than that?
Let us rethink the concept of the mind so that you have a different, and more effective, way of understanding exactly what is happening in your head while you trade, especially when you step outside your comfort zone. Have you ever truly paid attention to your thoughts while trading? Have you noticed that, often, a heated and intense debate breaks out inside your head when making a trading decision? Suddenly, “you” find yourself divided between two positions, or even more. It is as if a tug-of-war is taking place inside your head. There are at least two sides, actually quite a few more, as you will soon discover, competing to win the argument. So now “your” thoughts are divided into two opposing fronts, or more, trying to control the direction of your decision-making: what you are going to do.
This is where the trader gets into trouble. Often, the voice of reason is pushed into the background during the conflict taking place inside your head. Imagine the scene: you are in the eye of the storm, at the decisive moment, and reason, the very thing you need most to trade effectively, can no longer be heard. It is drowned out by a rising cacophony that escalates toward emotional collapse. Reason, silenced by more powerful voices, gives control of the mind to reactive and purely emotional thinking.
What are, and who are, those other voices trying to take control of your decisions when you are under pressure? Until you stop to observe the debate taking place in your head, it passes unnoticed, below the radar of your awareness. And, trapped in that lack of awareness about what is happening right in front of you, you remain stuck in self-limiting patterns that negatively affect your long-term trading performance.
You may deny that this internal struggle is constantly taking place in your mind, but you cannot deny the consequences, the drawdowns in your trading account, that come from denying this reality. It is precisely the act of turning a blind eye to this internal struggle that keeps you trapped in self-limiting patterns. Whether your problems occur when entering trades, managing them, or closing them while blaming yourself for losses, you will discover that a heated debate is taking place beneath the surface of your awareness. Sometimes that debate is critical or judgmental in nature; other times, it is euphoric in its temptation to throw careful risk control out the window. But the undeniable fact is that your mind is engaged in an intense dispute about how to manage uncertainty regarding the future consequences you are forced to deal with.
This is where the biology of the brain intersects with the psychology of the mind. Since the mind emerges from the brain, let us take a look at your trading brain/mind.
There Is a Lot of Activity Inside Your Head
For David Eagleman, a prominent neuroscientist and author, the brain is a community of rival programs that “duel” for control of the adaptive forces within the brain. These rival programs are emotional in nature and seek your short-term survival. They seek to control the outcome: survival in the present moment. They do not have the capacity to think long term, or to manage probability. Once a coalition of these emotional programs, embedded in the neural circuits, wins the battle for survival dominance, their reactive patterns begin to shape you. This is what you experience in the heated debates inside your head while trying to make trading decisions: the probability of achieving long-term gains in your decisions versus the short-term survival patterns that have become powerful and reactive.
David Rosenbaum, another prominent neuroscientist, goes one step further. He states that the brain is a jungle, inhabited by all kinds of creatures, governed by Darwinian laws of competition and cooperation. There lies the rivalry of competition, as well as the cooperation of teamwork, which ultimately shapes the brain/mind you bring to trading. Now, let us move one step further.
When the mind emerges from this community of rival programs called the brain, the brain’s programs gain a voice in the form of thoughts within your mind. Therefore, “your” thoughts are the product of various emotional programs that have established control over other emotional programs and are expressed verbally as thoughts in your mind. Except for the “rational” program, which is not one of the primitive emotional programs, they all have a bias toward short-term survival.
And because of your lack of understanding of the brain/mind, you have come to believe, by default, that a particular organization of these programs, which gain a voice in your mind, is truly “you.” Until these more primitive programs can be understood and regulated, there is very little chance that the “rational” program, or the Archetype of the Wise One, will take control of the thinking mind and trade successfully over the long term. And this is why people continue to fail at trading, even though they actually know how to trade.
They fail to activate the rational program, or maintain order, in the midst of tension and stress. To achieve this, you will need to reach a new understanding of the forces that make up the mind and learn how to observe those forces.
Activating the Latent Skill of Observation
Have you ever felt so stressed that you could not think clearly, then taken a pause, for example by going for a walk, taking a weekend getaway, or speaking with a trusted confidant, and returned with a renewed perspective on the problem that was troubling you? Of course you have. What you may not have realized is that, without knowing it, the ability of mindfulness was activated. And in that moment of calm, you were able to reorganize your thoughts. Transforming that raw talent into a refined skill is essential for restructuring the mind for trading.
Stepping away from the situation for a moment allowed you to observe the problem from a less overwhelmed point of view. This is mindfulness, or the awakening of the “observing self.” And it is a skill that can be developed so that you do not need to physically step away from a situation in order to see it from a different perspective. Instead, you develop the ability to distance yourself from the movements of your mental life and begin to question, or examine, the evidence on which any judgment or evaluation is based. In this way, you will no longer be surprised by “emotional hijackings” and you will be able to choose which aspect of your mind to apply to managing uncertainty, the determining factor of your trading success.
As you truly begin to practice this mindfulness, you discover that many of the unquestioned “truths” floating around in your head, such as the idea that the sky is falling or that there is gold at the end of the rainbow, which push you to act immediately, have no real foundation. For a trader, it is a humbling experience to absorb this reality. This is because, while under pressure, you acted based on unfounded evaluations that presented themselves as undeniable truths. This is precisely what happens when you manage to calm your emotions through emotional regulation, an essential process, and observe your thoughts through the lens of observation.
Suddenly, you, the trader, begin to realize that certain old and deeply rooted emotional programs in your brain have gained unrestricted access to the decisions of your trading mind. These old emotional programs, which gain a voice in your thoughts, were probably successful in another time and place, where they helped you adapt in order to survive. However, in the here and now of trading, where probability-based thinking, rather than a reactive survival-oriented mindset, is essential for long-term success, these programs are remnants of an outdated mindset that no longer has relevance in this “brave new world” of trading.
As a first step toward awakening the observer and cultivating mindfulness, I invite you to keep a specific journal of your trades. Begin by focusing on the internal debates that arise in your mind during critical moments. Ask the following questions of the “voices” involved in that discussion:
- What is the thought saying?
- What emotion is associated with that thought? Every thought depends on the underlying emotional state.
- What proof or evidence supports the evaluation it presents?
- Is it an objective truth, an undeniable fact, or is it rather an interpretation that may, or may not, be based on real evidence?
- Is this thought trying to help you, or is it hindering your progress as a trader?
- What happens to the voice of that thought at the exact moment when you “disidentify” from it in order to examine it objectively?
The survival-oriented part of your brain will always try to control the final outcome, even though that attempt is nothing more than a mere illusion. To achieve success in trading, the mind-brain connection must be reorganized around the only element it can truly control: your own performance in executing trades. The final result of a trade is uncontrollable; however, it is possible to organize your mind to exert control over your own performance. This is precisely where the competitive advantage that defines excellent performance lies. Next month, we will analyze in greater detail this “community” that resides within the mind. We will discover who its key players are and what their true intentions are.
Remember: inside you lies a veritable jungle waiting to be cultivated… as long as you possess the visual acuity and discernment necessary to perceive it.
