How to succeed when so many fail. The root cause

I have read in a lot of forums and online articles where many good intent people offer their perspectives on how to trade. The essence of it usually comes down to strategy, experience and discipline. I am in no way saying that these folks are wrong, but I have found for myself that the root cause that makes trading so difficult is mainly due to a seldom talked about or recognized aspect of trading which is called the amygdala hijack. It literally filters everything we see the moment we decide to open a position in the markets with REAL money, regardless of size or amount.

I have found that trading and money is akin to survival, it affects the part of our brain called the amygdala or the reptilian brain. It is an evolutionary knee jerk reaction that triggers pain or pleasure, fear or hope. So if one wins a trade, there is great euphoria, followed by fantasies of wealth, if one loses, there is great pain, regret and frustration, usually followed by great doubt, anger and revenge (trading). At this point, everyone usually blames themselves for feeling what they feel. I lost money, I’m nervous to trade, I waited to long, I jumped in too quick, etc. When in truth there is a somewhat invisible mechanism at work triggering each individual.

On a cognitive and intellectual level, you can say do this or do that when standing on the sidelines looking in, kinda like yelling at the players when watching a game. However, when an individual is IN the game, that objective perspective is replaced by a very deep and total animal sense of survival, there is very little to no subjectivity. That is why it is hard to see the market clearly when one has something at stake in it. You are mainly just focused on how near or far the market is from your entry point. The part of your brain that involves cognition (reason) is completely cut off by the amygdala, which is now taking over and trying to keep you alive.

So to be successful at trading, a person has to have a great sense of self awareness and emotional intelligence more than anything else. It is a fallacy that most people believe you have to be good at math to trade. That couldn’t be further from the truth. Trading is mainly pattern recognition (along with a solid strategy and money management), which is very straight forward, in truth 90% of trading it is being able transcend your emotions when they arise. Note, that I didn’t say remove, get rid of or ignore your emotions.

Trying to say, “don’t feel fear”, or “be emotionless”, is like trying to say don’t be frighten when watching a horror movie, or don’t get aroused when watching an adult movie. That is not to say you can’t subvert it, you can, BUT first you must recognize what the situation is and realize what you are getting into. Then, once you know the playing field, you can mentally prep yourself before getting into it and be ready for when the emotions DO arise. This takes effort and lots of practice.

The word discipline is also used a lot in trading, which I find to be a bit of a misnomer. It is as if you stepped on a nail, you feel an intense amount of pain in your foot and then someone says to you “will the pain away, it is only a mental reaction…if you can’t do it, then you aren’t disciplined enough”. Silly right? Yet when you Google “trading” and “discipline” there is so much dedicated to this subject as if one has the ability to simply will away these deeply evolutionary responses. And if you can’t will away these emotions, then it is implied that you are weak, a newbie, or undisciplined. Regardless, it is not a very encouraging tone.

So for me, the majority of trading is to dissociate with the emotions that arise as you watch the rise and fall of the markets. It is the ability to very gradually realize that what your emotions say is happening, meaning fear of loss (aka death) or hope of gain (aka safety and immortality), does not actually have any meaning. It is also the one pointed belief and burning desire to rise above these deep set responses - that to me is discipline.

That is why the people who have traded and succeed after a certain period of time (regardless of whether they are pros, retail traders, phd.s or high school dropouts) usually say that making money is rote, meaning mechanical, even boring. That is because the natural, instinctual sense of life or death that is hardwired in the amygdala is not kicking in to give one great highs or intense suicidal lows. They have managed to overcome or learned to disassociate from it, hence are able to see the market clearly and not affected by the sense of " I am losing!" or “I am winning!”.

So if a trader does not recognize this very root sense that arises during trading, then no technique, strategy or any amount of academic education will equate to success in the markets. You can spend years trading, testing your strategy or trying new strategies after each fail, and you will still be met with this somewhat impenetrable wall. You will look at those who succeed and wonder what they have that you don’t and eventually the pain will be too unbearable and you will give up, consoling yourself that you have other talents to be put to good use.

The reason so many people don’t succeed at trading is not because they are stupid or incapable, it is because they have to first identify what really is at the heart of their mistakes and then ALSO have the ability to change it.

The amygdala hijack reflex is so evolutionarily hardwired into our systems that it is very hard to transform it, it’s like learning to write cursive calligraphy with your left hand when you’ve been a righty all your life, BUT it can be done! So to those of you who are willing to dig deep into your own selves, then this will be a journey worth taking, as it will not only affect your trading account and financial health, but your overall outlook as a human being, as in the end, you will not be as swept away by the tides of fear and hope as most people are.

Good luck to all of you!!

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There is a lot of good stuff in the above post. This has come through in the research for the behavioral finance/economics field (my PhD has some roots there), with the work of Kahneman & Tversky (Michael Lewis’ latest book The Undoing Project is on the subject of their partnership) making up a very influential part of it with respect to decision making under uncertainty. Sound like trading?

While I haven’t talked about amygdalas, I - and a handful of others - have recommended getting into live trading ASAP. This is counter to the common advice you find to demo trade for a while before going live. I do so for exactly the reasons outlined above. Having real money at risk - even a small amount - is an entirely different experience than paper trading.

Additionally, the whole “discipline” discussion is something that has long struck me as being far too simplistic. I think the first person I found to really have addressed trading psychology from a properly useful perspective, and not just said “you must be disciplined”, was Brett Steenbarger in his first book The Psychology of Trading. He’s since written a couple of more. Full disclosure: I contributed a little bit to I believe his second book).

Back to the main point, the emotional response we have to trading and holding active positions is something that can be overcome through learning and experience - as commented on above. It’s part of why it takes time to actually become a consistently useful trader.

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Thank you, Godspeed108 for this post. It is indeed a different perspective of the trading psychology. Very useful!

Your very interesting post above quite makes me want to read it, actually … but I very strongly suspect (from seeing online parts of other things he’s written) that I wouldn’t really understand any of it. :8:

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He has a very entertaining blog at TraderFeed.
I usually understand it… I think.

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I’m sure. That’s “only me” - I didn’t intend it as a “veiled criticism” or “caustic aspersion” of him at all, I hasten to add: it’s just that I have Asperger’s syndrome and am for this reason close to devoid of anything approaching “psychological insight” at all. :8:

Well I appreciate where your comments are coming from but people do say the market is just a crowd subject to the regular instinctive and emotional impulses of every crowd or mob or herd we’ve ever seen.

As a seasoned market practitioner, maybe you actually do have more psychological insight than you give yourself credit for?

On the subject of the brain and the primitive region of the brain that controls our emotional reactions to the outside world, I will post a link to an article, written 10 years ago by Dr. Janice Dorn, which I saved (and posted in this forum back in 2012), which ties nicely into what Godspeed108 wrote about the amygdala and its role in trading decisions.

I’m not sure where Dr. Dorn is these days. Her website – thetradingdoctor.com – which I enjoyed immensely back in the day, has disappeared.

There’s no article in Wikipedia about Dr. Dorn; but, there is a CNBC profile of her, which I will link to.
(I don’t know how long ago that profile was posted.)

Anyway, I think Dr. Dorn’s comments about the trading brain have the ring of truth to them, and truth is eternal – so, the fact that her article is 10 years old shouldn’t detract from its usefulness to us ten years later.

Dr. Janice Dorn This is Your Brain on Trading – http://babypips-media-production.s3.amazonaws.com/forums/6/5/5/2/5/11262.attach.pdf

CNBC profile of Dr. Janice Dorn – http://www.cnbc.com/janice-dorn/

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Here’s a [I]Time[/I] magazine article which I copied, and posted in the forum, back in 2012. The article was written by Dr. John Coates as a sort of preview of his forthcoming book, [I]The Hour Between Dog and Wolf[/I]. I found this post when I was searching for the link to the Janice Dorn article.

This John Coates article isn’t about the amygdala and its role in the trading brain. It’s about the role of testosterone in trading success [I]and trading failure.[/I]

Risk Factor
By John Coates Monday, July 09, 2012

Every so often we read of a star trader who lost so much money that he gave back all the profits he made over several years and shook his bank to its foundations. How does this happen? Were the bank’s risk managers mistaken about this trader’s skill?

Maybe. But recent research suggests an alternative explanation–that the winning streak changed the trader. Human biology can help explain what drives traders to acts of folly.

When we take on risk, including financial risk, we don’t just think about it; we also prepare for it physically. Body and brain fuse as a single functioning unit. Consider what happens on the trading floor when news flashes across the wire. Traders’ senses are placed on high alert. Breathing accelerates; a thumping heart gears up for action. Muscles tense, stomachs knot, and sweating begins, a sign of anticipatory cooling. We do not regard information as computers do, dispassionately. We register it physically.

My colleagues at the University of Cambridge and I have conducted a series of experiments on London trading floors and found that during a winning streak, our biology can overreact and our risk taking can become pathological. When males enter competition, their testosterone levels surge, increasing their hemoglobin and hence their blood’s capacity to carry oxygen, and in the brain increasing their confidence and appetite for risk. The winner emerges with even higher levels of testosterone, and this heightens his chances of winning yet again, leading to a positive feedback loop known in animal behavior as the winner effect. For athletes preparing to compete, traders buying risky assets or even politicians gearing up for an election, this is a moment of transformation, what the French in the Middle Ages called “the hour between dog and wolf.”

At some point in this upward spiral of testosterone and victory, however, judgment becomes impaired. Effective risk taking morphs into overconfidence, and traders on a winning streak may take on positions of ever increasing size with ever worsening risk-reward trade-offs.

What happens to traders’ biology if these positions blow up? Their stress response goes into overdrive. The uncertainty people feel during a crisis can raise stress hormones and promote feelings of anxiety, a selective recall of disturbing memories and a tendency to find danger where none exists. The stress response may foster irrational risk aversion, impairing a person’s ability to manage positions taken on in more optimistic times.

In short, traders’ biology may cause them to take too much risk when on a winning streak and then too little when the market needs it most during a crisis. Risk managers at banks need to understand this biology. The statistical tools they rely on cannot catch the subterranean shifts taking place in their traders’ risk appetite.

Risk managers could, however, learn from sports scientists how to spot and manage exuberance, fatigue and stress. They may have to manage their traders much as coaches manage their athletes. And that means occasionally pulling them off the field until their biology resets.


Coates, a research fellow at the University of Cambridge, was a trader at Goldman Sachs and Deutsche Bank. He is the author of [I]The Hour Between Dog and Wolf[/I]

Dr. John Coates’ book [I]The Hour Between Dog and Wolf[/I] builds on research that he and his colleagues did at least 4 years earlier. This REUTERS ARTICLE briefly describes that earlier research.

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A very interesting thread with some very interesting points and articles. Psychology and the devastating, paralysing effects of poor psychology are under-discussed and very often underestimated. Generalised anxiety alone _ and the symptoms that ensue as a result of this - can wreak havoc with trading decisions . Unfortunately humans do not exist in a bubble of constant stress-free perfection and so the need to monitor ourselves and determine if we are “fit to trade” will always be an ongoing process. Sometimes we get it right…and sometimes we don’t. Hopefully we are more often right than wrong.

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To become successful in trading trader should work with patience. It is called key to success. We face failure many times but it is not the end of trading. Here you can find any good opportunity next time. You can manage your trading if had realistic goals and good strategy to work.

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We can not say if others are fail we can not make success in forex. I am very positive about myself because forex is my passion. It is giving me profit and in future my more goals will be achieved by forex. Every trader is different and all need a lot of hard work to improve their trading.

In theory, if you are disciplined, if you work hard and study hard you should succeed. Still, 95% of traders fail - do 95% fail to do any of these three things?

Failing in any field is not a problem but the real problem in forex is that many new traders do not want to learn even after repeated failure and just want to cover up losses and they end up losing more and more.

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It’s really a problem when after a few successes trader still follows past practices. You have to understand your mistakes in proper time.

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Trading should be done with proper money management skills and strategies so that root cause of failure can be reduced and must spent maximum time in demo account to improve our trading skills.

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The root cause is less knowledge and practice. We start live trading just after month demo trading. In demo it is easy to make profits traders think now they can handle live trading successfully this is a mistake they do , they stop their learning for better trading.

I agree with imbest, the underlying cause is less information and practice. Newbie begin live trading soon after month demo trading. In demo it is anything but difficult to make benefits traders figure now they can deal with live trading effectively this is a mix-up they do, they stop their learning for better trading.

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Unethical advertising by various brokers promising quick, easy and big profits certainly doesn’t help matters. Newbies are ignorant and sometimes naive and they believe those promises and lose all their money.

In case of failure we had to find the root cause so it is important that we had to make and follow some good trading plans and strategies with proper money management skills then proper entry and exit can be done.