Mastering the Head Game of Trading

08/04/2014 6:00 am EST


Rande Howell

Founder and Owner, Trader's State of Mind

Psychologist, Rande Howell of breaks down the importance of creating a sort-of organization system for the thoughts in your mind in order to better control your trading strategy.

Everyone has seen it happen. Something snaps and knowledgeable traders start falling apart and blowing it in the heat of trading. You probably have experienced it personally more than once. Retail traders and professional traders usually have different routes to the failure of their highly trained minds. But on the P&L statement of both—it shows up red.

The retail trader usually comes to the game of trading with a lack of tolerance for risking capital (expressed as a need for control over outcome) and believes ardently that superior knowledge is all he needs to win. Meanwhile, the professional trader sooner or later gets ambushed by euphoric over-confidence (irrational exuberance) and mismanages risk till it bites him hard. Euphoria smashed by serious threatening consequences, the memory of those losses then begins to foreshadow his calculation of entries. It’s hard to shake once the trauma of losses becomes real. Either way, both the retail and the professional traders end up with compromised minds at the very moment they need their A-game to perform.

This cycle is the never-ending story of both Main Street traders and Wall Street traders. At least until the trader begins to wise up to the "head game" aspect of trading. It is this inner game of trading that separates the wheat from the chaff. Mere knowledge versus performance—tested knowledge—being able to act coolly under pressure. And not being seduced either by fear’s irrational pessimism or by euphoria’s over-confidence and irrational exuberance.

Once the mind has been hijacked by emotions, it’s too late. The damage is done. But let’s say that you have learned to regulate emotions so that you are not being sucked into the vortex of either irrational pessimism or irrational exuberance (the two horsemen of the trading apocalypse)—what happens then?

The Mind in Conflict You Never Thought You Had

Let’s say you have succeeded in calming your emotions. What does that get you? It gets you to the door of the mind. It is here where you need to step back for a moment and ask the question, “What is the mind, anyway?” Most likely, your perception is that the mind is where your thoughts take place. Just you and your thoughts. How could it be more complicated than that?

Let’s re-think the mind so that you have a different, and more effective way of understanding of what, exactly, is going on in your head as you trade, when you get out of your comfort zone. Have you ever really noticed your thoughts while you are trading? Have you noticed that a heated and spirited debate often breaks out in your head when making a trading decision? Suddenly, you are of two minds, or more. It’s like a tug of war going on inside your head. There are at least two sides (actually a good bit more as you will come to learn) in competition to win the argument. So now your thoughts are divided into two armed camps (or more) trying to control the direction of decision making—of what you are going to do.

This is where the trader gets in trouble. Often, the voice of reason gets pushed aside during the conflict going on inside your head. Imagine, here you are in the thick of the moment, and reason (what you need most to trade effectively) is no longer heard over the cacophony ramping up to an emotional meltdown. Reason—drowned out by louder voices—results in reactive emotional thinking taking over the mind.

NEXT PAGE: The Voices, the Voices, the Voices


What and who are these other voices trying to get control over your decision making under pressure? Until you stop to notice the debate going on in your head, it just passes beneath the radar of your awareness. And in this mindlessness of what is happening right under your nose, you stay stuck in the self-limiting patterns that negatively impact long-term trading performance.

You can deny that this internal struggle goes on consistently in your mind, but you can’t deny the consequences (drawdowns in your trading account) of denying this reality. It's your turning a blind eye to this internal struggle that keeps you stuck in self-limiting patterns. Whether or not your problems are at trade entry, trade management, or exiting trades (beating yourself up for losing), you will find a raging debate going on beneath the surface of your awareness. Sometimes that debate is of a judgmental or critical nature and sometimes it is euphoric in its temptation to throw prudent risk control to the wind, but the fact remains that your mind is engaged in a heated debate about managing the uncertainty about future consequences with which you are forced to deal.

This is where the biology of the brain intersects with the psychology of the mind. Since the mind emerges from the brain, let’s take a look at your trading brain/mind.

It’s a Crowded Place Inside Your Head

To David Eagleman (an eminent neuro-scientist and author) the brain is a community of rival programs "duking it out" for control of the adaptive forces in the brain. These rival programs are emotional in nature and are seeking your short-term survival. They seek control of outcome—survival in the moment. They do not have the capacity to think long-term (to manage probability). Once a coalition of these emotional programs—embedded into neuro-circuits—wins the battle of survival dominance, their reactive patterns begin to make you. This is what you are experiencing in the heated debates in your head while you are trying to make trading decisions—the probability of long-term gain in your trading decisions versus the short-term survival patterns that have become powerful and reactive.

David Rosenbaum (another eminent neuro-scientist) takes it even a step further. He asserts that the brain is a jungle (occupied by all sorts of critters) governed by Darwinian laws of competition and cooperation. There lies the rivalry of competition and also the cooperation of team building that ultimately form the brain/mind that you bring to trading. Now let’s take it one step further.

When the mind emerges from this community of rival programs called the brain, the programs of the brain are given voice as thoughts in your mind. So your thoughts are the product of various emotional programs that have established control over other emotional programs and are given voice in the thoughts of your mind. Except for the rational program (which is not one of the primitive emotional programs), all have a bias for short-term survival.

And, in your lack of understanding of the brain/mind, you have come to believe (by default) that a particular organization of these programs’ given voice in your mind really is you. Until these more primitive programs can be understood and regulated, there is very little chance that the rational program—or the Sage Archetype—will seize control of the thinking mind and trade successfully for the long-term. And this is why people continue to fail at trading when they, in fact, know how to trade. They cannot get the rational program online (and maintain order) in the heat of stress. To do that, you are going to need to come to a new understanding of the forces that make up the mind and you are going to have to learn how to observe these forces.

NEXT PAGE: Harnessing the Forces


Activating the Dormant Skill of Observation

Have you ever been stressed to the point of not being able to think straight and taken a break (i.e. a walk, a weekend getaway, or talking to a trusted confidante) and come back with a fresh perspective on the problem that was giving you so much trouble? Of course you have. What you may not realize is that—unbeknownst to you—the talent of mindfulness was activated. And in that moment of calm, you were able to re-organize your thinking. Moving that raw talent into a refined skill is essential for rebuilding the mind for trading.

Stepping back out of the situation for a moment allowed you to see the problem from a less cluttered observation point. This is mindfulness, or awakening the observing self. And it can be developed as a skill so that you don’t have to physically step out of a situation to see the situation differently. Instead, you develop the skill of detaching yourself from the comings and goings of your thought life and begin questioning (examining) the evidence from which an assessment springs. This way, you no longer get ambushed by emotional hijackings and can choose which mind you bring to the management of uncertainty that defines your trading success.

As you begin to really practice this mindfulness, you discover that many of the unquestioned truths running around your head—i.e. declaring the sky is falling or that there is gold at the end of the rainbow—that urge immediate action have no grounding in fact. It’s humbling for a trader to come to grips with this. This is because, while under pressure, he or she has been acting on ungrounded assessments masquerading as irrevocable truths. This is what happens when you calm the emotions down through emotional regulation (which is essential) and see your thoughts through the lens of observation.

Suddenly, you, the trader, begins to see that old established emotional programs in the brain have been given unfettered access to the decisions of your trading mind. These old emotional programs—given voice in your thoughts—were probably successful in another time and place where they adapted you for survival. But in the here and now of trading, where probability-based (rather than reactive survival-based) thinking is essential for long-term success, they are an artifact of an earlier mind that is no longer relevant in the brave new world of trading.

As a start for awakening the observer and becoming mindful, I invite you to keep a specific journal of your trades. Start and focus on the internal debates you have at critical times. Ask these questions of the voices in the argument:

  • What is the thought saying?
  • What emotion is attached to the thought? (All thinking is emotional state dependent.)
  • What is the evidence that supports its assessment?
  • Is it true as a fact or is it only an assessment that may or may not be grounded in evidence?
  • Is the thought trying to help you or hinder your progress as a trader?
  • What happens to the voice of the thought as you un-fuse with it and examine it?


The survival part of your brain is always going to want to control outcome—even if it is only an illusion. The brain/mind, for trading success, is going to have to be reorganized around the one thing it can control—your performance of execution. The outcome of a trade cannot be controlled, but the mind can be organized to control its performance—that is the peak performance edge. Remember, it’s a jungle in there waiting to be cultivated—if you have the eyes to see and discern.

By Rande Howell of

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