Jan 26

How Brain-Lag Can Wreck Your Trading

I find brains fascinating. Gross, when you think about them in a human biology way, and grosser still when you consider them in a culinary context, but infinitely interesting when it comes to the way they work and what they actually do when they aren’t being eaten.

Traders have to be interested in their brains. They have to be intimately aware of their natural processes and responses so they can train their brain to work for them rather than against them.

I read an article this morning (hat-tip to @attitrade) about temptation and the mixed signals our brain sends off to utterly undermine our own ideas about the correct choice and propel us toward the fun choice – something we can witness pretty much every time we sit down to trade.

Chips, or a Carrot?

The article uses diet as an obvious example of temptation.

We know we should eat a nutrient-rich, low-calorie carrot because we’re big fatties – but we’re starving, and hot chips are so damn comforting! Added to that, everyone knows you have to eat approximately 372 carrots to actually feel full; not to mention the real concern you might die of culinary boredom before you’re even done.

Carrots are the right choice, but chips are far and away the fun choice.

It’s the same in trading. We know a small position size is the right choice, but loading up and winning big is the fun choice. We know following our plan is the right choice, but trading a rogue set-up and being proven right is the fun choice.

And here’s the conflict. When you’re standing there faced with a signal that’s so perfect it wouldn’t dare fail, and you have the choice to either play it the same as always with boring old 1% risk, or are tempted to whack on some extra size for good measure, there are actually two different parts of your brain vying for attention.

Which goes a long way toward explaining why I can often hear myself arguing with…myself.

One specific part of the brain is responsible for the “Trade me, I’m the perfect trade and I’m gonna make you rich!” voice (which left unchecked is definitely the more persuasive of the two), and then there’s the part that generates the Miss Goody Two Shoes voice, primly reminding you about your trading rules and that your position sizing algorithm is there for a reason. She’s no fun at all, really.

What the study in the article found out about these two warring parts of our brain was interesting and very relevant for traders.

Apparently we have one section of our brain – the ventromedial prefrontal cortex (vmPFC) – that lets us know we want something, and this is the more instant area to kick in. See temptation – want it.

The other area – the dorsolateral prefrontal cortex (dlPFC) – is responsible for our “I don’t want it” thoughts. See temptation – don’t want it.

The problem is that these brain signals are super-fast, so the one pertaining to our basic instinct – want the temptation – will always trigger first. There’s a lag when our instinct kicks in and runs rampant, before our better judgement pipes up and starts coaxing us away from the negative behaviour, or temptation.

So how can we manage this lag in our trading?

There are two main things that can help neutralise our conflicting brain signals – recognition, and practice.

Once you can recognise the impulses you have and have an awareness of what’s happening you can catch yourself before you leap into a trading temptation. The recognition of your unique temptations allows the other part of your brain to kick in more quickly, and over time with practice it will eventually be able to trigger itself before your natural instinct does.

In the study, the researchers found that dieters don’t have the same neural struggle, which shows that with practice people can improve their self-control.

In effect, over time and with increased awareness and practice,the good, correct trading decision becomes your natural instinct, and your brain won’t struggle against itself.

This is where real flow in trading comes – trading with quiet, and internal peace.

Related posts you might be interested in:

My Top 10 Destructive Trading Thoughts

Struggling As a Trader? Part 1, Part 2 and Part 3

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