The Illusion of Control: The First Step to Emotional Sobriety in Trading

The Illusion of Control: The First Step to Emotional Sobriety in Trading - May 4, 2012
By: J. Rande Howell

The Allure of Magical Thinking

It was the start of another trading day, and John was ready. “This day is going to be different. I am going to trade my plan – no matter what!” John said resolutely into his reflection in the mirror. He practiced visualizing and “feeling” the success that trading was going to bring him. He declared the affirmations that he learned from the success seminar he had just attended.

He felt the high-energy state that he now believed would create the "success mindset" he had been missing in his trading. And after all that modeling of a super trader, he knew he was attracting success. If he could walk on live coals, he had no doubt that he could conquer the fear that had been blocking him from success in trading. “I’m a million-dollar trader. I am going to conquer my fear. I am a confident and disciplined trader. I am going to win,” John confidently declared in his mind. And sure enough, self-doubt was nowhere to be seen.

All went well as he began his trading day. He felt great. His confidence was high as he watched a particular set-up heat up. This was the one he was looking for. It met his trading plan conditions for entry. With his new-found confidence as his guide, he pulled the trigger. Initially the trade trended as he had predicted. Then, WHAM, the trade went sideways on him and it stayed in flux for what seemed like an eternity. It nearly hit his stop a couple of times as it bounced around and it just would not refresh and trend as he had anticipated.

Suddenly, and without warning, he was not so sure. He was so sure just moments before. Now his confidence in the certainty of the trade evaporated like a mirage in a desert. Feeling knots in his stomach, all he could hear was the deafening roar of his thoughts, “You’re going to lose.” The self-doubt that moments before was "nowhere to be seen" was now front and center in his mind.

What seemed so certain just moments before was thrown into chaos. And out of that uncertainty came a fear of losing. He thought for certain that he could predict where the market was going. And with that certainty gone, fear of loss sprang from the uncertainty and he was no longer trading his plan. Instead he was trading from his fear of uncertainty. What happened that rearranged his thinking so quickly, so thoroughly?

The Trader’s Pursuit of the Myth of Certainty

The biggest problem I see that keeps traders stuck in mediocrity is their blindness to the need to change from a mindset rooted in predicting certainty of outcome to a probability mindset where the trader learns to live with uncertainty – literally becoming comfortable with not knowing with certainty what is going to happen. It takes internal courage to shift this fundamental biological and psychological bias in perception. Rarely is the mind that brings a person to trading going to be the mind that produces success in trading. The mindset that produces success in other domains of performance based on forcing a will upon the world or having a positive winning attitude does not translate well into trading success.

The evolutionary biological bias of your brain predisposes you to seek certainty and avoid uncertainty. (You can already see that this creates a problem in taking a brain designed for survival in an uncertain world and plopping it down into the world of trading without a significant reworking and override of primal directives of the survival brain.) This is your survival (emotional) brain at work. To your primitive brain, uncertainty, chaos, and the fear of death are linked (this is a serious glitch in the development of a trading mind). Add to this the fact that the untrained brain/mind cannot discern the difference between biological threat to the continuance of life and psychological discomfort. (This is a distinct problem in trading because there is always uncertainty and, therefore, psychological discomfort).

At its core the brain is a pattern-recognition machine that organizes the developing “you” into a set of beliefs that govern how you interpret and respond to a circumstance that is ambiguous in nature (like trading). Once your brain finds a random solution to a challenge you face, it habituates the solution into an automatic response that no longer requires additional thinking or problem solving. This produces hardwired neural pathways that automatically trigger when the organism (the trader) is exposed to ambiguity, uncertainty, or risk (threat). This mechanism is out of your working awareness and is reactive in nature. (For the trader, this creates a real barrier that compromises the capacity to work with the uncertainty found in trading.) The particular solution is not necessarily the best solution, but it is a successful short-time response to the environmental uncertainty your brain faced.

Then the brain takes another step – it generalizes the perception and response to a perceived threat (uncertainty) from one domain to similar ones. This is called response generalization. Suddenly the mind (and all its learned beliefs and behaviors) that the trader brought with him or her into trading becomes a liability to the development of a successful mind for trading. The mind that emerges from the biology of the brain does not separate uncertainty, ambiguity, confusion, and fear from one another. The emotional brain is biased to see the uncertainty found in trading as threatening. This brain and mind that you inherited was never built for the rigors of trading. It’s a liability that you, as a trader bring into trading as a biological bias – and you must retrain it to become a successful negotiator of uncertainty.

The brain, with its bias to create a sense of certainty (safe from threats to self), creates highly reactive patterns to keep the illusion of control of circumstance in place. There is even a name for this preponderance – cognitive dissonance. The brain you bring to trading will not accept facts or positions that do not support the current belief structure about its capacity to manage uncertainty (threat). The more facts to the contrary to which you expose the embedded belief, the more entrenched the belief becomes. This all exists so that the brain/mind can keep up its illusion of control.

It is this illusion of control that the trader brings to trading that must be altered for him or her to make the transition from certainty-thinking to probability-thinking.

Letting Go of the Illusion of Control

Trading effectively demands a probability mindset. There has to be a commitment to personal and professional development so that the trader can use the tools and skills of his trade, incorporating a set of beliefs that can manage probability and uncertainty. Otherwise, the trader stays stuck trying to produce certainty. This takes ontological change which most traders neglect, ignore, or avoid. (It represents change for which the outcome is uncertain.) Out of this resistance to challenge the myth of certainty, traders stay stuck in self-limiting beliefs that perpetuate the illusion of control. This is what has to change for a trader to make the jump from looking for certainty to managing uncertainty and risk.

The very first step towards reconstructing the beliefs about the management of certainty (trading not to lose) that the trader naturally brings to trading is to wake up to them. Most traders have been mindlessly attempting to force both trading and the markets into patterns that can be predicted with certainty – more commonly known as "trading not to lose". This is the bias that has been embedded into our perception for countless generations. Most traders talk the talk of working with probability, but when their trading account’s health is used as the basis of assessment, a different story emerges.

Fear of loss in the brain (and the confusion generated by uncertainty) is equated with the fear of death. This is what takes over the trading mind that is led by the prediction of certainty. When you look at serious hesitation problems in pulling the trigger or the hijacking of impartial thinking that happens while managing a trade after entry (like our friend in the vignette), this correlation becomes apparent.

Probability-thinking and perception does not come naturally. Traders generally go through a long learning curve to move from the mind that they brought to trading (rooted in certainty-thinking) to the mind that trades successfully. The first step is to wake up from the blindness that keeps the trader from seeing the self-limiting beliefs that hold him in a pattern-recognition bias that force the mind to seek certainty rather than the management of uncertainty.

It is this AHA! moment that opens the door to the possibility of change. What most traders discover is that the certainty bias is deeply entrenched and takes real work to change. They recognize that the comfort zone of the way they have been stands in the way of the mindset that is needed for success in trading. This is the first step in the new journey into the re-invention of the self. Only from there can the self be re-constructed from the inside out. In the opening vignette, this is the problem that the trader was experiencing. He was trying to change the self externally. By not grasping the power of biological pattern rooted in the need for certainty, he was never able to develop the skills and tools necessary to change the pattern-making machinery of his brain/mind. The pattern of belief was far more primitive and powerful than the puny tricks he used to try to change that pattern.

In truth, he resisted changing into the person he needed to become. Instead, he confused short-term “feel good” states with the mechanics of change. He remained "blind to what he was blind to". He missed the first step – recognizing the bias toward certainty. It "had" him and it was so familiar that he could not “see” it.

How Do I Use This Knowledge?

I make the following assumptions when I evaluate whether a trader is ready for true psychological change. First, that he has been trading long enough to know HOW to technically trade. Second, that he can trade successfully in simulation where the risk of capital does not trigger the fear of uncertainty.

So, look at your trading account. It will reflect the beliefs and biases that you bring to trading. If your trading account remains marginal or continues to need injections of capital, then you need to be asking yourself: What I am blind to that keeps me from achieving my potential in trading? Stay in that question. Then listen. What do you observe? Notice your resistance. Notice what happens to your comfort zone. Notice the tendency to pull back into your familiar pattern despite its lack of achieving success for you. What do you notice about your need to maintain a sense of certainty in the face of uncertainty? What beliefs (about the management of uncertainty or certainty) is this rooted in?

About J. Rande Howell
www.tradersstateofmind.com

Rande Howell (MEd, LPC) helps traders develop a peak performance state of mind. He is both a licensed therapist and performance coach whose work is grounded in emotional regulation, mindfulness, and Jungian archetypes applied to trading. He has a clinical background in training people to master their emotions and to transform self-limiting beliefs into productive mindsets. His work centers on how to break the fear-based beliefs that imprison a trader's performance and that block the development of a trader's potential to achieve financial and personal dreams. By learning how to manage the biology of emotion, real and long lasting changes can then be made to the mind's core beliefs from which the trader engages the uncertainty, risk, and probability that must be mastered in trading. He is the author of four books including Mindful Trading: Mastering Your Emotions and the Inner Game of Trading.