Building a Probability-Based Mind

Understanding the Gap Between Your Knowledge and Your Performance

To achieve their dreams, traders have a much higher mountain to climb than they realize.  By not understanding the problem, they stay stuck in self-limiting patterns.  Emotions and trading mindset do not appear on a trader’s “must have” radar until pain forces them into recognizing the deficits in their trading performances.  After getting gashed several times or experiencing the death of a thousand tiny cuts, they start considering that their head game may be part of the problem – only to discover it’s a very large part. 

They have chased external solutions to their trading performance, adding stuff to reduce risk and increase prediction to the point that it gets unwieldy and cumbersome to use.  They have also bounced around different experts’ rooms – believing that the solution is “out there” waiting to be found.  Years (and lost opportunity) pass while they are stuck in the pursuit of the fallacy of the Holy Grail.  Finally, those who are left standing discover it is their mindset that is the real root of the problem.  And they are poised to fix it.  But even if they want to get to the meat of the problem and fix it – what exactly is the problem with their trading psychology?  

What if the problem were more than your mental performance psychology?  What if the problem in your trading performance was bigger than just a few cognitive adjustments to thought reframing (the quick fix)?  What if you could not just take the bull by the horns and will your way to winning?  What if the problem was really rooted in your brain and biology of survival – far beyond personal flaws in performance psychology?  The truth is that tweaking your psychology is never going to be enough to solve this trading problem of performance under the stress of risk and potential loss rooted in the survival instincts of your limbic brain.  And your primal emotional brain just does not behave the way you want it to.  It does not think. It emotes.  What does that mean?

Your Brain Is Not Built to Manage Probability

Here’s a quote from Stephen Porges, PhD, (an imminent neuro-researcher of primal emotional systems and their regulation in brain and body) in his book, The Healing Power of Emotion. 

“Our (central) nervous system functions as a sentry by continuously evaluating risk in the environment.  Through neural surveillance mechanisms, our brain identifies features of risk and safety.  Many of the features of risk and safety are not learned, but rather are hardwired into our nervous system and reflect adaptive strategies associated with our phylogenetic history (early ancestors from another time and place and long before thinking was on the human horizon).   

These adaptive strategies are automatic (implicit) and out of conscious awareness (explicit).  They do not think as you understand it – they are hardwired to react for short term survival.  Now, let’s apply the reality of what Porges is declaring to you, the trader.  First, notice that the brain is built to evaluate risk (your capital) in the environment (the markets).  Second, your brain comes front-loaded with hardwired automatic responses that are adaptive to short term survival, rather than long term gain (a bummer for the long term probability mindset needed for trading effectively).  The third part is that this is going on behind your back, out of your awareness.  And what are you doing as a trader?  You are evaluating risk and safety from a thinking brain perspective, while the brain is handling the job from a primal, emotional brain position.   Who do you figure is going to win this fight?  It’s a slam dunk.  And the thinking brain never sees the hijacking coming.  Under the conditions of risk and stress, it never gets the memo in the first place until after the fact.

What does this look like in trading? 

The trader is focused on planning his trade and then trading his plan.  This is where the edge in probability favors the trader.  That is your rational thinking brain’s solution to probability enhancement.  It seems only logical to do it this way.  Unfortunately, we have anointed logic and the thinking brain as the king (which blinds you to the power of the emotional brain), when really it is only the servant to the primal instincts of survival for the emotional brain.  And guess what happens when you walk into a trading situation with a determination that you are going to “plan your trade, and trade your plan”?  This logical approach rarely succeeds.  And if it did go according to plan, there would be a lot more successful traders than there are.  What happens instead is that your thinking brain is simply, and unceremoniously, over-written by a far more primitive and powerful competitive system in the brain/mind that you bring to the performance of trading.  That highly prized thinking brain was locked out of the brain’s decision-making tree.  And you were unaware of this.

Let me give you an example of how lighting fast decisions are really made in trading.  The circumstances will be unique, but look at the guiding principle that drives decision making in the brain that finally filters into your trading mind. 

A certain client has a problem with impulsive and revenge trading that bedevils him.  He will jump into trades that, in retrospect, he knows were not in his trading plan for the day.  He also revenge trades and will not let go of a position that has gone against him and simply will not give up, fighting to the last ounce of his strength.  He’s perplexed.  He knows better than this, but he cannot stop himself.

Why would the emotional brain override his carefully laid plans?  Let’s review how his brain adapted to experience.  This man grew up in a South American country where a military junta ruled with an iron fist.  His family was being hunted down by death squads.  Fear was everywhere.  Eventually his father was captured and simply disappeared without a trace.  Constantly on the run, his mother left her son with various relatives and friends for his protection.  He constantly faced poverty, hunger, and fear for his life for many years.  Survival was a real and present danger.

Just getting enough to eat at times was a life or death situation for him and his family.  And they were depending on him to be able to beg, borrow, or steal enough food to survive.  He had to succeed or his family would suffer.  He literally faced life and death situations with only his wits to help him.  He had to win the day – everybody was depending on him.   These were the environmental circumstances that his limbic brain had mandated in order for him to survive.

Consider what his brain learned about survival – “you must win, everybody is depending on you in the darkest hours”.  This adaptive learning was key to him and his family in order to survive against incredible odds.  And it was hardwired into him as a successful survival strategy at the level of the limbic brain – and before thinking.

Limbic (Emotional) Learning Migrates from the Past to the Present Moment

Now fast forward several decades.  He is an adult now whose drive has produced success on a large scale.  He owns a conglomerate company that has hundreds of employees.  This fierce need to succeed (or else) drove him to financial success that few achieve.  Then he began trading.  That’s where the trouble began.  He had been hardwired to not take a loss (it’s lethal, remember) and he had to succeed because many were depending on him.  The brain is evaluating risk and safety for its short term survival mandate.  In trading, where the brain is supposed to evaluate risk and safety in the context of long term probability potential, unconscious (implicit) adaptive responses the emotional brain made in another time and place are triggered in the face of the uncertainty of risk and safety by the short term survival instincts experienced long ago.  Limbic learning swamps the rational trading plan. 

In that moment the thinking brain simply is not accessible.  The automatic response to the threat of uncertainty and risk is:  He MUST succeed because everyone is depending on him.  When he experiences a trade going against him, the mental model is exactly the emotive response of his limbic brain to the situation.  Thinking is pushed aside until it is safe.  Remember in his adaptive response to challenges of uncertainty and risk is a mandate to succeed at all costs.  In the new environment of trading, the response to perceived threat is disastrous.

This is how the limbic brain learns how to interact with the environment of potential risk and threat.  Look at your own trading to see what limbic learning is managing your encounters with uncertainty and risk.  It does not have to be as dramatic as the real life example above.  Scarcity thinking is adaptive and is rampant in the families of the world. The point is that the survival instincts of your limbic brain will adapt to solutions to uncertainty, threat, opportunity, and risk.  Once it finds a solution that works for the short term survival of the organism (trader), it will lock the answer into a permanent response pattern to perceived threats or opportunities.  And until you learn how to unlock these unconscious (implicit) remedies, you are stuck with them.  That’s the rub. 

Add Psychology to Adaptive, Survival-Focused Limbic Learning

Up until this moment psychology is not the driver of the reactivity to uncertainty and risk.  This is the way a mammalian brain evolved to deal with the challenges of living and stress.  Now let’s take these limbic learnings (that are happening below conscious threshold) as they work with the thinking brain.  Those limbic solutions to managing uncertainty take on the power of beliefs.  At first it is all about survival in the moment.  As psychology awakens, beliefs about your capacity to deal with uncertainty begin consolidating from these limbic learnings.  Now instead of just a survival adaptation working with conditions in the environment, the organism (the trader) encodes beliefs that are at the root of the limbic solution.

As psychology arises from its biological ground, the trader comes to believe certain things about him or herself.  That they are inadequate (not smart enough), have to win to matter, don’t deserve success, or are powerless to influence their destiny.  These beliefs, once formed and encoded into psychology, are projected onto the markets.  This is where you figure out that you are trading your beliefs about your capacity to manage the challenges of life.  And then a story (called a narrative) is created in the emerging mind that explains what the limbic or emotional brain has already decided.  Now you have psychology interfacing with biology.

Traders tell stories about their beliefs of winning and losing.  About making things happen and being in control.  The alpha wants to win to prove himself, while the perfectionist wants to do everything right so he will not lose.  It is these stories that constitute your psychology of winning, off being right, or of never measuring up.  And as you tell these stories to yourself and act on these stories, you find out if they are effective at extracting capital from the markets.  The story and the beliefs that drive your narrative are revealed in the health of your trading account.  At the core are the beliefs that arose from the limbic response to the challenges of uncertainty and risk.  The thinking brain simply created a story to justify what the limbic or emotional brain decided.  That is where traders arrive in their trading, get stuck, and stay stuck – until they come to understand that beliefs, like limbic learnings, are fluid and adaptable.

This is the link between your emotional brain adapting you to survive in an environment (remember our friend who survived the death squads) and the psychological beliefs that arise from those learnings.  Every time you experience fear in some aspect of trading, you are experiencing the adaptive limbic learning that has given rise to your beliefs about your capacity to manage uncertainty.  Your trading account reveals whether or not those beliefs, rooted in the adaptive responses from your past, are effective for managing the uncertainty of probability.  Unfortunately most traders stay stuck in their thinking brain’s invented story and avoid getting at the root of the problem and changing the way their trading mind engages uncertainty.

The Triumph of Trading Psychology – Emotional Brain and Thinking Mind Integration

The emotional and thinking brain need to work together to build the mind optimal for effective management of uncertainty and risk – the trading mind.  In the same way the brain shapes the mind, the mind can also shape the brain.  This is the loop that links biology and psychology.  There is a mountain to climb – no doubt about it.  And you can redesign a brain that evolved for short term survival in the face of risk and uncertainty into a trading mind that is comfortable engaging uncertainty and risk.  This is the challenge of developing the trading mind.

My attempt here is to help you understand the problem that has to be solved if you wish to develop an effective trading mind.  Without understanding the problem properly, there is little likelihood that the trading mind can be developed.  But understanding the problem in new light gives direction to the quest.  It is the first step.  The mountain still has to be climbed, but with new understanding you can climb in the light of your new awareness.