Whatever mental obstacles you may have when trading, they generally can be categorized into Fear, Euphoria and Self Sabotage. If these 3 emotions can be controlled and conquered, the trader will be left with a clear neutral mindset that is most conducive to trading objectively and without bias. And these emotional blocks are generally the result of a loss of balance in the objective non biased mindset.
Fear – Fear is a major obstacle in trading as around 85% of trading psychological problem is associated with fear and fear is basically pain avoidance. If a person has lost money trading in the past, it is normal for him to associate past painful trades with current market situations, so the fear they experience in the market is a self generated experience. Fear is an animal’s natural emotion to encourage avoidance, in prehistoric hunter and gatherer days, fear was a very useful emotion for the caveman to avoid predators and high cliffs to survive. But fear is also a very debilitating form of energy as it causes us to withdraw, to protect ourselves, to run, and narrow our focus of attention, all very counter productive in absorbing market information and trading in the moment. Fear induced pain avoidance in everyday life prompts us to block out painful traumatic memories and allow us to carry on with our lives. But in trading, if vital market data is blocked out, or avoided, the results maybe disastrous if we perceive certain market information as painful. Hence fear or pain avoidance may not be the most useful emotion in this case. If we perceive certain market information as painful (IE: the price of the stock we just bought took a nosedive) then we are likely to block out that painful information by rationalization like delegating a short term trading position into a long term investment position. The interesting fact is that if we didn’t own the stock, and hence emotionally detached from the stock, we would have clearly and objectively seen the nosedive and objectively judged the trade as a bad trade without unnecessary justification. Another reaction to fear is that fear paralyzes us, freezes us, a natural reaction when hiding from a predator when we must remain absolutely still, this is innate in all animals. Yet freezing up from fear is counter productive in trading. If you are facing an opportunity that your system is telling you to trade, you may suffer fear or trauma from past failures that causes you to hesitate to take the position and may sometimes cause you to lose the chance to profit. In the worse case scenario if a trader has had traumatic failures in the past, he may develop a fear of the markets, or pain associated with the market. In this debilitating frame of mind, it is next to impossible to trade and trust one’s judgment, in some severe cases, the trader may even have illusion to think that the market is against him personally, like “ why do I always buy at the highest point and sell at the cheapest point”, when the market doesn’t really care where
one trader bought or sold. It is not hard to see how fear tampers with objectivity and a productive state of mind. Most people were brought up with the idea that “mistakes must be avoided at all costs,” “there must be something wrong with me if I make a mistake” so the thought of making a mistake is extremely painful to them. Winners in any field have a mind set to not fear mistakes, they are not afraid of making a mistake, and do not think any less of themselves when they make a mistake, so in other words they can face their mistakes objectively and monitor themselves effectively, this is very difficult to do if a person has painful association with making mistakes. Self monitoring is a skill essential for successful trading, and people who have painful association with making mistakes have trouble self-monitoring. Fear consists of roughly 85% of the mental obstacles to trading success. If one can conquer fear, he has come close to success, but not quite there until he overcomes the remaining hurdles of euphoria and self sabotage.
The trader finds himself in the face of two emotions that can come up to block his success once he started winning.
Euphoria and Self Sabotage –
A trader gets a hold of his natural instincts of fear in the markets and starts winning, ironically; in the moment he realizes he is winning is the moment he is exposed to the emotional pitfalls of euphoria and self sabotage. As mentioned, these two emotions only come up after winning, but if you starting winning consistently, everything seems to be going fine, which is very hard for the average person to want to be concerned with any potential problems, especially with traps that feels as good as euphoria of personal achievement or as elusive as self sabotage. Euphoria creates a sense of supreme confidence where the possibility of anything going wrong is virtually inconceivable and hence causes traders to ignore risk management and warning signs. On the contrary, errors that come from self-sabotage come from conflicts traders have regarding their beliefs about themselves and their desire and deservingness of success or money. As a result, roughly half of the traders experience the so called “boom and bust” cycles in their trading. These are the traders who have learned how to make money, experienced success, but the euphoria and self sabotage which follows success robs them of the money they had made; they have not learned how to keep the money they made.
Euphoria is almost an opposite state of mind from fear. If fear debilitates a person from performing at his full potential, then euphoria encourages him to make careless mistakes and promotes recklessness in trading. Euphoria is easy to slip into when one is winning consistently. So that supreme sense of confidence developed prompts the trader to overtrade, which is putting on too large a position for the equity at hand, and being
careless of risk control is a sure way to bust out in trading. However, as soon as the trader puts on a too-large position, tiny price fluctuations in the price will have serious impact on his account equity. On the other hand, the lack of confidence can be equally detrimental to trading as making decisive choices in a timely manner without hesitation requires confidence and belief in one’s own judgment. Mental state management requires the trader to delicately balance between the state of confidence and euphoria; their difference lies in that euphoria is a state of overconfidence where you cannot perceive anything to go wrong. Confidence on the other hand is totally accepting that anything can happen on the next trade, win or lose, yet having a strong, unshakeable belief in an uncertain outcome with an edge in your favor. In other words, over a large sample size of trades, there will be a net positive result on earnings.
Self sabotage is one of the most interesting phenomena in psychology, as it represents manifestation of conflicts within a person’s mind. There have been cases when a person strongly desires a particular outcome in life, and is totally dedicated to do whatever it takes to achieve that goal whether it be to make a certain amount of money, or experience closer relationships with other people. With those people, they have a conscious desire, but do not truly believe they can achieve it. So they often get really close to their goals and all the sudden find themselves destroying the efforts they have made, no matter how hard they have worked at it. This is the phenomena of self sabotage, as the human mind does not like conflicts between reality and the perception of reality, so if there is a conflict between reality and a perception of reality, the human mind will do all that is necessary to have those two images match. For example a person wants to earn 100 thousand dollars (conscious desire), but he does not truly believe he can accumulate that much money (perception of reality-belief), so if he eventually works hard and makes 100 thousand dollars (reality), this fact represents a conflict between belief and reality in the person’s mind, which is an uncomfortable situation for the brain, so the sub-conscious mind will unconsciously cause the person to engage in illogical acts to lose the 100 thousand dollars in order to let the belief and reality match. Tragic stories of people who won the lottery happen too often to prove this point. It sounds insane, but the reality is most people have this mechanism limiting their full potential. Self sabotage can potentially be very damaging in trading, but most people do not realize that it exists. Common sign of self sabotage in trading manifest itself as careless errors that seems idiotic at times. Errors such as putting in a sell for a buy or indulging yourself in some distracting activities with a open position in the market without a stop loss order; these are typical examples of how traders subconsciously make sure that they don’t win. The bottom line is all traders consciously want to win. Yet, there are some underlying psychological conflicts regarding winning. In other words, not all parts of the trader agree for the same outcome of winning. There maybe a deep rooted programming either from religion, childhood, etc. (EI, the phrase of “money is the root of all evil”) that make people think they don’t deserve success or don’t deserve money. So if a trader wants to earn money consciously, but subconsciously believes that “money is the root of all evil”, or if he believes “ I do not deserve all this money, I am not good enough” he most likely will win some money and lose it unconsciously, because his conscious desire is in conflict with his belief. The mind wants to make sure that the real world is in line with the perceived world. This conflict is the root cause of self sabotage. So what we believe we are worth or deserve determines how much we ultimately get. Traders need to realize that self sabotage exist, and establish new empowering beliefs that is helpful for trading success. Only when one truly believes he deserves success and success is good, can he hold onto success without any mental conflicts.