The

Trader's Lifecycle

an Introduction to

Trading Psychology

by Eddie Z

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Introduction - Preventing the Psychological Pitfalls of Trading

The purpose of the e-guide is to explain to you what I have coined The Traders

Life Cycle. Without a doubt, understanding the Traders Life Cycle is a very

important part of becoming a successful trader; for those of you that do not

understand it risk falling into the 80% plus category of traders who simply never

make it. A thorough understanding will prevent some very treacherous pitfalls.

I have been trading for over 25 years now and have become obsessed with the

way psychology and emotions affect the traders performance and decision

making. My desire to understand how we can influence our trading by

understanding our emotions led me to learn more about how the brain, how it

processes stimuli and how we can learn to control our emotional reactions this

stimuli.

Having a basic understanding of human emotions, especially where and how they

are derived, can greatly enhance our understanding of ourselves and ultimately

affect how successful we are as traders. Traders travel on an emotional roller

coaster as they first become introduced to, learn about, practice and eventually

become seasoned traders. The Traders Life Cycle is an examination of this roller

coaster and how having an awareness of it can greatly improve our chances for

success.

The idea of understanding the behavior and psychology of successful traders has

intrigued many people and it has even become a science of its own. Over the

years, despite the increasing awareness on how human behavior is affected by

the markets, there are only a handful of traders who have learned to understand

this phenomenon and have been able to achieve emotional balance.

So, whether you are a new trader or an experienced one, controlling your

emotions is one of the most important things to do if you want to be successful.

Knowing how to do it is the challenge. I sincerely hope is that this e-guide

becomes your call to action to learn how to control your and emotions.

The Amygdala

Whether we like it or not, we as human beings process the world in front of us

based on our past experiences

literally our filter or lens in which we perceive the world. When we perceive new

events and experiences, we assign varying degrees of importance via our

emotions. This processing of emotional memories happens in the part of the

brain called the amygdala (highlighted in

are two tonsil like structures are located

brain.

The amygdala is directly linked to our responses of fear AND our responses of

pleasure. Sometimes the cells of the amygdala produce large quantities of

endorphins which stimulate feelings of pleasure.

At other times, the amygdala releases

to release epinephrine and glucocorticoids. These two hormones are responsible

for the human fear reaction

Amygdala and How We Process Information:

Whether we like it or not, we as human beings process the world in front of us

based on our past experiences. In essence, all of our memories of the past are

or lens in which we perceive the world. When we perceive new

eriences, we assign varying degrees of importance via our

emotions. This processing of emotional memories happens in the part of the

(highlighted in red below). The amygdala essentially

are two tonsil like structures are located within the medial temporal lobes of the

The amygdala is directly linked to our responses of fear AND our responses of

pleasure. Sometimes the cells of the amygdala produce large quantities of

endorphins which stimulate feelings of pleasure.

At other times, the amygdala releases chemicals which trigger the adrenal glands

to release epinephrine and glucocorticoids. These two hormones are responsible

human fear reaction also known as the fight or flight response

Whether we like it or not, we as human beings process the world in front of us

. In essence, all of our memories of the past are

or lens in which we perceive the world. When we perceive new

eriences, we assign varying degrees of importance via our

emotions. This processing of emotional memories happens in the part of the

The amygdala essentially

within the medial temporal lobes of the

The amygdala is directly linked to our responses of fear AND our responses of

pleasure. Sometimes the cells of the amygdala produce large quantities of

the adrenal glands

to release epinephrine and glucocorticoids. These two hormones are responsible

fight or flight response.

The Fight or Flight Response: A physiological reaction in response to stress,

characterized by an increase in heart rate and blood pressure, elevation of

glucose levels in the blood, and redistribution of blood from the digestive tract to

the muscles. These changes are caused by activation of the sympathetic nervous

system by epinephrine (adrenaline), which prepares the body to fight or flee

from a perceived threat.

Many studies suggest that we can control our amygdala for positive feedback and

response. Some call this "pushing the amygdala is forward," since it will stimulate

the frontal lobes and trigger the reward centers of the brain for positive emotion.

The opposite is called "pushing the amygdala backwards" which stimulates the

reptilian part (older, earlier evolved, animal area) of the brain that triggers fear

and the automatic responses caused by fear.

As you can see our amygdala plays an important role in our decision process so as

a trader, knowing what it is and what role it plays in determining our emotions

becomes a priority.

The Trader's Life Cycle:

The Traders Life Cycle is a way of understanding the mental and emotional

evolution of the beginning trader to a seasoned one. The main goal of looking at

the Traders Life Cycle is to understand the direct relationship between our brain,

our emotions and the evolution our trading skill set.

Studies of human behavior patterns have proven that our feelings and emotions

affect specific parts of the brain creating response patterns that repeat over and

over. These patterns are not permanent and can be changed for our own benefit.

Looking at the Trader's Life Cycle will empower us to understand our emotional

patterns and responses so we can become more successful traders. Let's take a

look at the four stages of the Trader's Life Cycle:

First Stage: Attraction & Romance:

Attraction: The power or act of alluring, drawing to, inviting, or engaging

(Websters dictionary)

Romance: A dreamy, imaginative habit of mind; a disposition to ignore

what is real (Websters dictionary)

The journey usually begins with a story about a friend or relative (or friend of a

friend) who made a killing trading the markets. This feeling of intrigue may even

be reinforced by CNBC or other media outlets. Intrigue turns to curiosity and

then to hope.

This is the first and most innocent stage, where the trader begins. He discovers

the idea of trading and thinks he is in love. The trader has very little knowledge

about the markets and just feels attracted to the possibility of making a lot of

money. There is an excitement in the newness and the potential for finding

happiness in trading. In the beginning, this new trader may even believe he has

found his new calling or career.

Some beginners at this point will even open an account and just begin buying and

selling based on random ideas and thoughts about how the market works. In a

way this is a gambling phase but can be a necessary step in order to move

towards further research. Some will trade with real money while others will use

simulated accounts.

As the novice begins to understand that trading isn't quite as easy as he originally

thought, the quest may begin to find the PERFECT "system" that will make him

wealthy quickly. He is full of hope and cannot wait to start making money. There

is a tremendous urge for action.

During this stage the trader experiences a lot of excitement and anticipation.

Excitement has been described as "an extension of the natural emotion of joy

and happiness. In the brain, this excitement emotion is registered by the

prefrontal cortex which is in charge of the perception of patterns that monitor the

progress in a new activity. This stage triggers the reward system which gives the

new trader the drive to pursue his dream. The getting rich quick idea activates

a quick dopamine (brain chemical that produces pleasure) kick and keeps him

motivated.

The high levels of dopamine produce high levels of infatuation in the trader.

Excitement and motivation are good but they should be based on realistic

expectations. Unfortunately becoming a trader is portrayed just like the take a

pill and lose 25 lbs in 2 weeks advertisement. Media will always tell us what we

want to hear. The trader will soon find out how misleading the finding the holy

grail and become rich quick promises are.

Our society is driven by the instant gratification idea. When we want something,

we want it now. Trading is not different. During this stage, the trader enhances

his reward system by focusing only on the result: I want to make money and be

rich now. Little thought is given to the actual process. The focus on getting

rich now could be so strong that it becomes a trading behavior where the trader

is willing to break rules and ignore problem signals, because his brain is

completely crowded with the idea of the end result. If not corrected, in time this

behavior could cause a lot of emotional and financial pain.

Second Stage: Power Struggle:

This is the stage where the trader now has some experience trading and probably

has had some successes and some failures. More often than not, the trader is at a

breakeven level or lower, meaning he has most likely not earned a lot (if any)

money since he started trading. This fact begins the cycle of stimulation and

eventual over stimulation of the amygdala. The fight or flight response is

beginning to kick in gradually each day as the frustration sets in.

This also can be termed an ego stage. The trader feels ready to make money

and needs to participate to prove himself right. He is driven by greed, fear and

hope.

Fight Response Trigger: Here is an example of what happens to the inexperienced

trader who is in this stage and "fight" get triggered:

An entry "alert" goes off, the trader sees/hears it and gets excited about an

opportunity. The trader tries to recognize a pattern. But because of the prior lack

of success, the amygdala triggers the fight or flight response. What happens is

that the trader cannot see the pattern because his emotions are overreacting to

the physiological response. Energy is actually moving away from the reasoning

areas of the brain; the areas that are better able to make rational decisions about

trading. Feeling so emotionally overwhelmed, the trader second guesses

himself, and does not follow the rules, will likely over trade and "fight" the

obvious market trend.

Wounded and in pain, the traders ego takes over; and the "need to be right"

becomes overpowering. On the surface it just looks like he is trying really hard to

make money. However, deep down, what he is really trying to do is to get

acceptance, to look good, to be right, and to fulfill all the emotional needs that

weren't fulfilled in an earlier part of life.

The BIG PROBLEM for us humans is that we perceive that the amount of

money in our wallets as being directly correlated to our survival. And if

our wallet, or amount of money we have is threatened, we literally think

our survival and our life is at risk! In other words, our brains react the same

way to loss in the market the same way we would react by being chased by

a lion!

So as time goes on and losses set in, we feel our survival is threatened. Our

amygdala triggers the fight or flight response over and over again.

After a period of time with constantly increasing fight or flight response, the brain

begins to reactivate other painful events in the traders memory. Images of prior

traumas and prior fight or flight responses begin to appear and suddenly all the

"head trash" comes right to the surface. It can truly be a vicious cycle that seems

inescapable.

"Flight Response Trigger" On the flip side of the "fight" response, some traders

respond with "flight". If the "flight" response is triggered, the trader will also

have a high level of anxiety. Blood pressure and heart rate might even rise

causing him to panic, potentially freeze and do nothing. Due to the lack of

experience and so much confusion, the traders brain is short circuited. Because

of past experiences and pattern recognition, the traders mind recognizes

emotional pain. Again, on the surface, it looks like he just doesnt know what to

do, but at that moment what is coming up for him are the feelings of not being

good enough, not being able to succeed, not being accepted and looking bad

again. In other words, previous emotional traumas.

During the power struggle stage, the trader may have some good in addition to

the bad days. The trader will go on a rollercoaster of high and low dopamine

levels. When the trader has a good day, the dopamine will go high and with it,

the trader's ego. He will feel very proud and dangerously cocky. This level of

circumstantial confidence will make him take higher risks more impulsively.

Inevitably, these highs will be followed by the lows. The day will come when the

traders high risk trades become disasters. Dopamine will drop as will his ability

to see things in perspective. These lows and highs will happen over and over

creating an emotional imbalance. The trader is not struggling with the market,

the trader is struggling with himself. The trader is not in control, his fight or fight

response is. The trader has not yet learned to calm his amygdala down.

It is very common for the trader to get stuck in this reactionary behavior and

victimize himself over and over. At the subconscious level, there is subtle

addiction to pain that will take the trader to an absolute climax. At this point

the trader may "go for broke" and completely blow up his accounts and/or

become so emotionally unbalanced that it feels completely unbearable and he

quits. The sad truth is that the majority of would-be traders never recover their

sense of self esteem and empowerment.

On the other hand, there is another group of traders that cannot deal with the

pain anymore and decide to make a shift in their trading. They have come to the

realization that if they keep doing what they have been doing, they will keep

getting the same results.

Third Stage: Acceptance & Change:

Acceptance: The mental attitude that something is believable and should

be accepted as true (Websters Dictionary)

Change: Any variation or alteration, a passing from one state or form to

another, as, a change of countenance, a change of habits or principles.

(Websters Dictionary)

Jesse Livermore, one of history's best traders, once said:

Wall Street never changes, the pockets change, the suckers change, the

stocks change, but Wall Street never changes, because human nature

never changes.

Livermore could not have said it any clearer. It is the human that needs to

change; it is the trader who needs to move towards new behaviors. Before

change takes place, the trader has to come to a state of acceptance where he

totally surrenders the ego and the need of instant gratification.

Once the trader has mentally accepted the need for change, the hard work will

begin. Change is not easy but it is definitely possible. For change to happen, the

old behaviors will have to be substituted for the new ones.

The trader will have to reprogram his amygdala and recreate a new reward

system that will keep him on track. Thanks to something called "brain plasticity,"

change is possible.

Brain Plasticity: Brain plasticity refers to the capacity of the nervous

system to change its structure and, its function over a lifetime, in reaction

to environmental diversity

It has been proven that even as adults we can still create new connections in the

brain by creating new thought patterns and by replacing the old comfortable

behaviors with new ones.

This change requires discipline and persistence. The old brain patterns, while still

deeply engraved, will try to fight back constantly, so repetition is essential. The

trader is literally trying to rewire his brain. In order to do that, the trader will

need to associate these new behaviors with new rewards.

By making these behaviors new habits, the brain will start producing the protein

called BDNF (brain-derived neurothrophic factor), which encourages the growth

of new neural pathways and stimulates brain plasticity. Simply put, the traders

thoughts and behaviors will physiologically change his brain.

Once new pathways are created, new associations will be made allowing the

trader to have more control over his amygdalas reactions to his trading. So,

when a buy or sell trigger alert goes off, the trader will not automatically jump

and get excited. He will be calm and emotionally detached because now he has

an action plan that he follows every time.

Before the market even opens, the trader will examine his physical and mental

state. If he is not physically or mentally fit for trading that day, he will simply not

trade. He understands that trading takes a lot of energy and concentration, so

being 100% is essential.

From my own experiences with trading, I have learned that if I am sick, for

example, I am better off staying away from the market. Trading is not like your

traditional office job where you can wing it even when you dont feel so well. The

trader needs to be alert at all times to trade well, so if the trader is not feeling

it, it is ok. The market will always be there.

Mental Rehearsal: On the other hand, if the trader feels good and decides to

trade, he will then proceed to do a mental check-up, which allows him to

mentally practice a behavior before it happens. Some people call this

visualization" or "mental rehearsal. The name doesnt really matter, as long

as, you understand the importance of doing it all the time. We will talk more

about mental rehearsal as you progress thru the EZ Trading Psychology material.

Mental Rehearsal allows the trader to play different scenarios and mentally

practice how he will react to different situations. After doing this, he will

determine and remind himself of his risk tolerance. The R (risk tolerance) could

be determined either per trade, per day, per week, etc. Every traders risk and

pain tolerance is different, so he will need to know how much he can afford to

lose and still be ok. Losing is part of trading so knowing how to take a loss keeps

the traders expectations real.

Once R has been determined, he will be ready to trade. He will put all his

emotions and opinions aside and will simply follow the market signals. When an

alarm goes off, he will observe and analyze before making a decision. Just like a

lion stalks his pray before running after it; the trader will wait patiently for the

right moment. Once he spots the right opportunity, just like the lion, he will act

with confidence and do what his system tells him to do. After this, he will

monitor the market and his positions. He will follow his system and wait for the

next signal that will tell him to either take profit or exit the trade.

At the end of a trading day, he will go over his trades and analyze them. The

trader knows that by being honest to himself he can separate his emotions and

solely look at his actions according to the system he follows.

For change to really happen, the trader follows these steps over and over so they

become behaviors and not reactionary impulses. By doing this, he will be able to

own the system and be in control of his emotions and his amygdala. Again we will

discuss ways to change your habit patterns in upcoming EZ Trading Psychology

materials and webinars etc.

By achieving control, the trader will shift his focus to the process and not just the

end result. He will let go of the instant gratification idea because he

understands that trading doesnt define who he really is. His new reward is

feeling in control of his own destiny and his own emotions.

Fourth Stage: Commitment

Commitment: The act of binding yourself to a course of action. An

agreement or pledge to do something in the future (Webster's Dictionary)

The traders journey could not be complete without commitment. Commitment

is having the character, discipline and desire to create and design your own

destiny. Once the trader is committed to trading, he will take responsibility for

his actions; he will honor his word and have integrity regardless of the

circumstances or what others might think.

He doesnt not blame the market, the economy and/or the politicians for his own

mistakes. He is committed to becoming a better trader and a better person. He

is open to the new possibilities and is always learning.

What to Do Next:

Most likely if you have read this introductory e-guide, you are in the place where

you are ready to learn more about the Acceptance and Change Stage. As you

heard in the first video, the pain of a catastrophic loss event is what most often

triggers the need to change. For me, It wasn't until I lost over 5 figures in one

day for 5 full days in a row...including 2 days over 25 thousand that threw me

into excruciating mental pain.

After a brief time vacation from the market and a conversation with dad, I

realized that I had to take a look at what was driving my behaviors and what

was behind the need to be right. At that point is when I found my close friend Dr

Kenneth Reid. Dr. Reid is a trading coach, has a Ph.D. in clinical psychology and

also happens to be a real trader himself. His experience as a trader and in

psychology is a combination that is hard to find in coach.

What Dr. Reid did was to take an inventory of my personality, essentially an X-

Ray of what drives me as a person. After his assessment, Dr Reid was able to

give me a blueprint of the behavior patterns that drive my trading. Once I had

that awareness, I was able to target the exact emotional responses that I needed

to change. This awareness was critical to understanding what needed to be

changed. I am so incredibly thankful to Dr. Reid for giving me this awareness

because even though I had a lot of doubt, I was able to make full recovery and

make ALL the necessary changes I needed to make.

Fortunately I was able to make all the necessary adjustments and after some time

being profitable again, I thought it would a great idea if we could offer a product

where traders could get a X-Ray of their trading personality. Essentially a

personality test that is specific to traders. In other words, some kind of

assessment where a trader can see exactly what motivates him and what his

trader personality is. This way traders could easily see what behaviors they need

to focus on to change and which one they should reinforce.

So with the brilliance of Dr. Kenneth Reid's behavioral theories and my technology

experience, together we were able to come up the Comprehensive Trader

Personality Profile (CTPP for short). This is the ultimate online tool for traders

who want to figure out which behavior patterns and personality traits help or hurt

their trading.

The CTPP takes about 20 minutes to complete, but once you do you will :

Get crystal clear about your strengths and weaknesses

Understand how your Trader Type runs your trading

Discover how your brain dominance influences you.

Get frank feedback about your risk-taking habits

Check out the Comprehensive Trader Personality Profile Here:

http://www.eztradingpsychology.com/

WHY IS THE TRADING PERSONALITY PROFILE NEEDED?

Simple. Many traders over-focus on market behavior. The most under-rated

asset individual traders possess, however, is our ability to understand and

manage our own behavior.

Unlike other entrepreneurial activities, trading is a lonely business. The

Comprehensive Trader Personality Profile is designed to give you valuable

information on four key dimensions that traders rarely get feedback about:

Your Trader Personality Type

Your Natural Trading Style (method)

Your Brain Dominance

Your Trader Risk Profile

Self-knowledge is power. These assessments will empower you to take control of

your trading. Begin your profile now.

http://www.eztradingpsychology.com/