Let’s do a review to date of what I have discussed so far in relation to brain anatomy and what each participant is involved with when it comes to trading decisions. The four major lobes of the brain are color labeled below. Recall in the Frontal Lobe resides the prefrontal cortex (PFC), also known as the director or executive center. This is the area of the brain responsible for accurate decision making, trade predictions, trade entries and exits. It works best on single tasking, uses a lot of energy to focus, and can get easily distracted by useless actors. It works best by clearing the deck of anything that interferes with your lone concentration on your trade right in front of you.
PFC
Inside your temporal lobe if we slice away the surface lies the hippocampus, storehouse of short-term memories, like your most recent trading wins and losses. Our memories are more intense when emotions are running hot, like fear invoked trading. The burn and pain felt from an emotional trade has the ability to alter how your next trades will be seen from your altered perceptions of reality and decisions made in your PFC.
Now if we slice the brain in half from front to the back of the head we have a view of the internal structures involved. Here we can see the Limbic System or Limbic Lobe. Limbic in Latin means border, and this border is between the brain cortex and internal brain structures.
The Limbic system includes the hippocampus as well as the close by emotional hub called the amygdala. The amygdala is involved in a kind of primitive emotional memory, one that is likely preserved by evolution. Fear, anger, euphoria, and excessive greed all emanate from the amygdala. I wonder if any of those fabulous 4 have ever affected your trading decisions? The stronger your PFC is the more likely you will be able to maintain composure and control the emotional amygdala outbursts our ancestors displayed to survive millennia ago. It will also keep you from buying and selling trading positions based on the emotional rollercoaster you experience from tickers gone wild, fed official chatter, and headlines used as click bait and memories from past trades trickling in from your hippocampus.
As we progress through the nervous system it’s wise to be aware of what parts of your brain do and how you are thinking at any given moment. Knowing what is going under your hood enables you to control your innate emotional centers and leads to better more profitable trading decisions.
Enuf said.