A Disguised Fear of Loss and the Future

Written by on September 6, 2013 in psychology of trading

Steve stared at the set-up. It was a close match for what he was seeking. He had seen this pattern emerge many times before and was comfortable that this was a high probability trade – right in line with his trading plan. Now all he had to do was get the right price. He put in his order at a rock bottom price figuring that he was managing any potential for loss. And then he waited for it to be filled. And he waited. As he waited, he watched as the trade kept climbing. Finally it had run its course and Steve, again, had been left on the sideline of the trade – his order was never filled. And this was not the first time. It was a persistent pattern that defied explanation.

Frustrated, he looked at his charts and recognized for the umpteenth time he had let a high probability, low risk trade slip through his fingers because he had insisted on a rock bottom price when, in fact, if he had acted within the price range that his trading plan had called for, he would have been able to profitably enter the trade with plenty of room to spare. This was a persistent pattern in his trading, and he did not understand it. There was also a sense of relief that he had not lost capital. He really liked keeping his potential losses to a minimum. Ex-comptroller that he was, he took great pride in loss abatement. When he looked at his ratio of winners to losers, he smiled. It was good. It was very good.

The problem was that he was not entering enough trades to make a comfortable living. The truly frustrating part for Steve was that he knew he knew how to trade. He was good enough at his methodology that he could teach it. The problem, as he saw it, was that he could not find the perfect blend of indicators and signals that would make his system work properly. As soon as he figured that out, he knew he would be able to make his financial dreams come true.

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Being Blind to a Self-Limiting Pattern
If you look at Steve’s situation from a third party, emotionally detached, perspective, it is easy to superficially spot the problem. He simply needs to tweak his trading plan to allow more flexibility in what price he is willing to pay to enter a trade. After all, there was plenty of room for a profit. With his trading plan modified, he would have more flexibility on his entry points and would confidently ride the high probability, low risk trade predicted by his charting. Following this line of thinking, the problem would then be solved.

And if traders were, in fact, rational and emotionally detached human beings, this would be the case. However, because they are human, actually all their thinking is emotional state dependent. And what lurks in the shadows of the mind (pushed far away from conscious awareness), does create a persistent pattern of perception, emotion, thinking, and behavior that limits a trader’s potential for peak performance trading. The trader becomes blind to this pattern operating in the background of his awareness – he does not even see it influencing this perception. Off his radar screen, it keeps hijacking his capacity to successfully perform in his trading.

Here is the way one trader described this form of blindness:

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“Most traders don’t believe one of the key variables to successful trading is themselves. Thus, they ignore or underestimate the importance of themselves as a key piece of the puzzle, which is why they get “tunnel vision” about their trade methods.

I also see an escalating situation where traders realize that they have a discipline problem via publicly stating such as a fact…they believe their “self help” solution is too fine tuned for their trade method. Simply, once again, they fall back into the trap that it’s about the trade method, only under the facade they are working on their discipline problems.

Further, just as much of a problem, many of those that show up to give advice about the discipline problems…their recommendation involves changing, tweaking or fine tuning the trade method. This pattern (pun intended) helps instill the belief that if we fix the trade method…we’ll become disciplined traders. It just doesn’t work like that.”

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Like many traders before him, initially Steve was resistant to exploring how he was part of the problem. He looked everywhere but failed to look at his psychological contribution to his trading problem. As a rationally trained man, he believed the problem was “out there”. And that he, of course, was rational. The problem, in his perception, was to be fixed by altering the variables of his trading plan. The trading plan was the problem. If the trading plan were fixed, his problem would go away. What he had to acknowledge, though, was that after five years of rationally “fixing” his trading plan (when it worked quite well in simulation) was that the trading plan was not the problem – he was. But how?

Trading “Not to Lose”, Rather Than Trading With an Edge

When Steve began to examine beliefs that he brought into trading, he discovered he carried more emotional baggage than he initially thought. And, in his mindlessness, these deeply held beliefs directed what his rational mind saw. His hard-nosed approach to price and avoidance of loss, under close scrutiny, was not the product of rational, impartial problem solving. It was fear masquerading as reason.

What Steve discovered was that he had been using “rationally thinking” as a way of avoiding his discomfort that trading forced into the conscious mind. Uncertainty and loss had become associated with one another in Steve’s brain/mind – his perceptual map. He carried this fear of loss in the face of uncertainty as self limiting belief now. But it was beneath the surface. It was like a submarine, beneath the surface, torpedoing a ship on the surface. Fear was the submarine. Rational was the ship on the surface. His trading was the casualty.

When he traded, he triggered to this perceptual map that had become a self-fulfilling prophesy. The truth, beneath his rational exterior, was that he believed that the uncertainty of the markets would lead to loss if he were not very careful. Out of this deeply held and unconscious, fear-based belief, he created a rational cover up to avoid the potential for loss. By never getting the price he wanted, he avoided the fear of uncertainty that kept blowing up this trading plan.

With his rational mind doing the bidding of his fear-based beliefs, he avoided the potential for loss in his trading. There was nothing wrong with his trading plan, he discovered. The limitation to his trading was based on the rules of uncertainty and loss he had learned as he grew up in a family that experienced terrible financial losses in his formative years. These years had been tough on the family. In the face of survival, they had learned the hard way to avoid uncertainty and to only risk when you could not lose.

This way of seeing the world (that the world is a dangerous place and you’d better be careful) became the hidden assumption that guided Steve’s development of risk management. And in his profession prior to trading, as a corporate comptroller, this perceptual map worked well. Steve did not see his perspective as a personal bias though; he saw it “as the way it is”. This is because it had become a familiar pattern and was pushed into the background of his awareness.

The very skill set that gave Steve an “edge” in corporate finance had become a liability in trading. He had developed a habit of trading “not to lose”, rather than a mindset of accepting and managing the risk of probabilities that trading demands

Steve came to recognize that it was not his trading plan that needed to change – it was him. This is not to say that his trading plan does not need to evolve, along with him, as he moves deeper into his journey of trading. What Steve came to understand was that he is an inseparable element from his trading. Each element – from platform to methodology to personal psychology – has to be woven together with care to create successful trading.

And without a close examination of the beliefs in which his psychology is rooted, he was missing the access to a key element to successful trading. He fell into the deception that he was rational and that “rational” was normal – even superior. It felt emotionless, which he had been taught was how a trader needed to trade. This was also a stumbling block to his growth as a trader. What he discovered was that “rational” is an emotional state among other emotional states. And that he could hide his discomfort behind the façade of “being emotionless” that a rational emotional state provides.

Rational became a defense that allowed him to avoid looking deeper into himself. After closer inspection he discovered that a deeply rooted fear of loss had caused him to stay out of trades. Demanding a price that the market was not willing to give became a way for him to avoid his fear that he might lose. And with his logic and rational thinking captured by this fear, he produced a trading plan of elaborate criterion that looked good and keep him out of trades. And because it was so familiar to him, he never saw the self limiting beliefs operating within him.

Mindfulness as Part of a Psychological Trading Plan

You have just read about a trader wakening up from his mindlessness. He was so absorbed by his logic that he could not see that it was blinding him to the core problem. It kept him focused on the surface of the problem. He saw symptoms of the deeper problem, but the symptoms so pre-occupied him that he thought the symptoms were the problem. He was lost in his direction, but making good time.

Questions for Developing Your Mindfulness:
(1) If you take a look at the symptoms of your trading, what do you discover?

(2) What is the consistent behavioral performance that keeps repeating itself?

Then let’s go a little deeper.

(3) What kind of game plan seems to be in place?

For the trader in the example above, for instance, the game plan was “not to lose”. His game plan did not include managing the risk of uncertainty so that probability was on his side. He kept telling himself that in his self deception he was trading to win, but his behavioral performances over time told a different story. His logic actually covered up the deeper self-limiting belief that was at the core of his lackluster trading performance. The second part of his game plan was to hide from his fear, and he accomplished that by staying stuck in a kind of “logical thinking” that produces merely surface evaluation – projecting the problem outside of the self – rather than a mindful attitude that looks for the beliefs beneath the performance.

(4) Based on your trading performances, not on your rhetoric, what beliefs actually drive your trading?

No one is going to be looking at your answers to these questions. The questions are designed to help you discover the current psychological organization of self that trades your platform and methodology. Becoming mindful of them is a major step in changing them into more effective beliefs that open up the possibility of peak performance trading.

As long as hidden beliefs stay out of sight, they are out of mind. But, they still influence your trading performance. You are simply mindless of (i.e. blind to) their influence much like a horse with blinders on never sees the green grass on each side of the path. The blinders become the “tunnel vision” that limits what the horse (or the trader) sees and can act upon. Developing this kind of mindfulness is a major element in the evolution of a trader. Without its development, you stay stuck in the pattern of seeking answers “out there”. With it, the trader becomes aware of the tunnel vision that has blinded his development. Blinders off, a new vision of trading emerges where platform, methodology, and personal psychology coalesce into a dynamic new possibility of peak performance trading.

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This information is provided by J. Rande Howell, author of Mindful Trading: Mastering Your Emotions and the Inner Game. For more information or to sign up for his free newsletter, visit Traders State of Mind.

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