One of the most beneficial aspects of understanding how your own brain and mind work in trading is the profits. That’s why we do this right? Once you become mindful of your brain and what it is doing at any given time, it’s profit time.
Progressing along from our last post lets explore why we are so prone to make our next trade based on the outcomes of the last several recent trades. By now you have experienced the euphoria of a big winner, leading you into a bullish mindset in your next trade, perhaps adding on more shares or options just because you can afford it now from the last trades. Then the market pulls back, leaving you naked on the shore as the tide goes out.
Have you ever gotten a spanking by Mr. Market, decided to really reduce your next trade size, and the market decided to take off without you. Your decision to sit out was anatomical, and how your brain works. Everything packed into your skull has adapted over millennia to keep our species alive. To keep alive, our ancestors needed to protect themselves from dangerous situations, a neighboring wild animal, or even worse a brute from your own species who feels he needs to pound you out.
The anatomy….
Do you recall how close your short-term memory centers in your hippocampus are to your emotional hub, the amygdala? This proximity is anatomical to protect us from an era of saber-tooth tigers, but not so advantageous for tracking tickers on a computer screen. Let’s face it if your buddy just got his arm ripped off, you would keep that memory close at hand upon the next visit from the saber-tooth. Yet if we are not aware of how our brain will react when the stressful feeling of fear emerges from our amygdala initiated from a recent trade memory housed in your hippocampus, you will move into survival mode and exit trades(run) when you shouldn’t and enter others(fight) at the worst possible time. Flight or fight is not the best trading strategy.
Once you are aware of how your brain perceives threats you can consciously recognize fear as just what it is, a future imagined emotion created from a remnant of our past. You can say to yourself, “ah , that’s just how this brain thing works”, visualize the hippocampus-amygdala hug, and instead of exiting a good trade or jumping into something you shouldn’t, simply hold fast to your trading strategy. That is called being mindful and knowing how your brain works.
What it also allows you to do is observe with curiosity only, the masses making foolish trades. From your executive center PFC vantage point, you only watch them and wait for the best time to take advantage of their trades based on primitive reactions buried in our neurology.
Brain based trading is a new concept. It explains how successful traders carefully use their own understanding of their innate neural patterns to their own advantage while trading. Careful observation and awareness of your own patterns and responses leads to better more profitable trading.
Enuf said.