Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
Conquering Uncertainty in Trading
06/06/2011 8:00 am EST
Uncertainty can sabotage traders' best efforts, but trade psychology expert Rande Howell explains how to program—or re-program—your thought process in order to perform in spite of it.
Rande Howell joins me in the MoneyShow.com Video Network studio….Uncertainty seems to be bane of the market. Traders don’t like it and it's a fact of life. How do we deal with it?
You change your mindset. You begin to realize that your brain was never developed to be able to separate uncertainty from fear. That's just our evolution.
In trading, you're forced to be able to separate uncertainty from fear or you continue failing.
How do you do that, because we are triggered with this “fight-or-flight” syndrome; it's in our DNA. So how do you tamp that down?
Wow, interesting question. The very first thing is you actually have to learn to be able to control the emotion of fear.
One of the best ways—actually, it's been done by the Hindus for 5000 years—is you start a breathing practice where breathing is so related to the emotional state.
When a person is in fear, they will either hold their breath or they will be panting. What that does is it cuts off oxygen to the brain, which means you can't think.
It also accelerates heart rate, which starts the whole adrenal thing, and you end up with a chemistry in the body that sweeps you away into fear. Then you start fearful thinking and you're gone.
In breathing, what happens is you begin to short circuit that and you come back to where you're no longer triggered to fear, but there's the uncertainty, and that's when it gets really interesting.
What is the process? How can you teach me to manage this uncertainty?
OK, it starts again with the breathing and relaxation. Many years ago, Herb Benson proved that you can take stressful situations and you can train yourself to trigger to calmness. That is the first essential thing for any trader is to be able to maintain that calmness, trigger that calmness.
Then you need to be able to say “What is uncertainty?” and you begin to define anew what uncertainty is.
NEXT: Tips for Beating Fear and Uncertainty in Trading|pagebreak|
Actually, the markets are really like an ocean, and what you really are is a surfer, and you're surfing waves in Hawaii. These are 40-foot waves. You have to develop the skills. The ocean doesn't even know you're there, OK? It can care less.
You get on the wave and if you bring the skills with you, and if you bring the emotional regulation skills with you, what you do is the uncertainty then opens up to the probability of a great ride.
You develop the mindset of probability rather than just uncertainty glued to fear, but it's uncertainty glued to probability.
If you have a good edge with your system, that's where you are and that's where you make money.
The probabilities of success or failure; which is the biggest fear you find in traders?
The biggest fear…there's actually two of them.
The biggest fear is pulling the trigger. You will see people…the brain and the finger are 18 inches away, and you would think that the finger did not have so much control over everything, but they get into a mindset of “What if I lose, what if, what if?”
They don’t breathe, they don't do anything like that. The uncertainty swells. It triggers to the fear and before you know it, fear has compromised thinking and all your thinking is a negative appraisal of everything. You hesitate and you stay away and you panic. That's how you start.
The second one is actually fear of making mistakes. You think about how—logically—how incredibly counterproductive that is. If you develop an edge, the really truly great traders are, like, 61% with a 3:1 ratio. These guys are losing 35%-40% of the time.
So they can't have a fear of losing to be able to maintain probability thinking. Yet that has to be trained because ultimately, first genetics is not going to separate uncertainly from fear, and most of the time, our psychology, as we develop, we learn to avoid mistakes instead of learn from mistakes.
You can't avoid things in trading. That's what I love about trading is that people avoid their little psychological demons for most of their lives incredibly well…
Until they get to the trading.
Then those very psychological demons stop them, and you have to deal with them.
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