Mastering Trading Psychology

Mastering Trading Psychology: Getting to the Next Level

Article on Trader Psychology by Rande Howell, Trader Psychologist


Part of the growth of a trader is to learn from his mistakes.  Nowhere is this more evident than in self-sabotage.  The growth comes in learning to look at the sabotage as a correctable psychological mistake that has to be addressed.  And much of the problem is the trader’s concept about winning.


Everybody is focused on winning, as if a trader can control whether he or she can win.  In truth the trader has no control over outcome…but way too much time and effort is focused on winning.  Both evolution and psychology conspire to create a powerful obstacle to being a successful trader.  Human evolution’s success is built upon being able to control both environment and outcome as a survival condition.  In the world of our ancestors, where survival was a short term quest, this trait got wired into the human experience.  It was useful in a dangerous world of long ago.  But today there are no lions, tigers, and bears lurking around in the environment.  However the trait remains and ends up showing up in trading whenever there is risk involved.  This trait triggers automatically out of generations of adaptive responses to the danger of uncertainty.


This short-term survival instinct is alive and well every time a trader avoids getting into a trade for fear of losing control over outcome.  It is there every time a trader experiences the urgency to act before the opportunity is gone.  Traders have to learn to calm these hardwired reactions in their trading.  Keeping the body and brain calm becomes a necessity in order to move from acting on survival instincts and, instead, move towards a probability-based mindset where thinking is not dominated by short-term survival wiring.


It is the psychology of winning, though, that really needs to be examined.  Included in this notion of winning is also “not losing”.  Culturally we are shaped to want to win in competition.  And traders enter the arena of trading with the beliefs that they are competing to win against the markets.  The problem is that on a human interaction level in life outside trading, humans can focus on the desired outcome - winning.  But in the trading environment, controlling winning is not possible. 


The markets are simply too vast to control outcome.  But traders persist in believing they can control outcome.  They trade to win or trade not to lose in an effort to extract capital out of the markets.  And, no matter what, they do not want to be a loser.  So focused they are on winning, traders do not see the value in becoming good losers.  Yet long term successful traders are very good losers.  In fact, they “win” by minimizing losses.  When they see that the trade has little probability of working out in their favor, they minimize the loss.  This is simply the probability mindset that is necessary in successful trading. 


The probability mindset is focused on performance, not outcome.  This is what the developed mind has learned.  The old mind is possessed to win or not lose as a survival strategy that has become psychological trait.  The new mind is focused on managing the process of the trade (what might be called “Doing your job”).  Short term drivers are still present that traders will always have to temper.  Yet with training and experience, a new probability-based mindset performs in the moment rather than falling back to the old survival-based mind.


It is here that sabotage can teach the trader – if the trader is willing to listen beyond his or her survival instincts and a psychology developed around winning and not being a loser.  That psychology does not work in trading.  It has to evolve into probability management.  Your trading account will tell you how well you are accomplishing this monumental task. 


First, find out what’s behind the self-sabotage.  It will be a mixture of inherited biology and an adapted psychology of winning.  Once you have discovered this, you have the opportunity to learn how to manage your biology so that you do not act from survival instincts.  Then dig into your psychology of winning beliefs and recognize the need in trading for losing well.  Focus your mind on performance and the beliefs behind the performance.  This is where the magic is.