Trading Perception Errors

Our most crucial decision making for trades are performed and acted upon based on the functions performed in our Prefrontal Cortex. By keeping your PFC open and not distracted, we enter and exit trades at the best times to enhance our profits.

As you begin to rely on yourself for your trading you need to know how your brain works. Today we dive into accurate thinking and perception errors. We like to think that our memories are flawless. Nothing could be more inaccurate.

Our memories are created from what we perceive from our various senses. Initially those multiple perceptions get stored short term in the hippocampus. Based on the intensity of the experience and practiced recall, it may get stored in longer term memory centers in your brain cortex. When you recall that memory some time later it is sent back to the PFC to help you make current decisions. The memory is a reconstruct, not an actual play by play movie. Here is where the errors creep in.

Neuroscientists have shown for years that eye witness accounts are horrendously inaccurate. Witnesses confabulate stories to fill in blanks in their memories. And they are absolutely positive they are accurate, even when confronted by their obvious blunders in recall.

Magicians create illusions based on their knowledge of how humans constantly misperceive reality. They have developed a practical knowledge of how to do things right in front of your face without you seeing or perceiving that these things occurred. The flaws are in your perception.

It takes a realist/zen master/ego controller to recognize that our perceptions of what is going on in the market is often very limited. Once you can handle that you may be wrong in your perception(almost everyone is), you can tame your ego to the point of opening to reality.

You cannot absolutely trust anything you think you see or perceive. There are simply too many flaws in the ways our brain constructs these perceptions. That should be a humbling reality. I still grapple with it.

You may have heard about confirmation bias. This thinking bias supports beliefs we already hold, including the tendency to notice and accept confirming information while ignoring or rationalizing conflicting information. If you’re bullish you fail to see weakening relative strength, falling MACD levels and low volume. All you see is a one-day big bounce and jump aboard the Titanic without a life preserver.

Our perceptions are not passive. In fact, our brains actively construct a picture(yes we think in pictures) of what is going on around us based on a small fraction of all the sensory information that’s coming in, which introduces many opportunities for distortions and error. We filter out most sensory information that reaches us and pay attention to only what we deem to be important.

Some of the best traders around trade alone. One of the reasons is they do not want to be influenced by other opinions. They turn off the volume on CNBC and Bloomberg. They rarely look at headlines on how the market is doing today, because they know the headline itself is someone’s opinion. They have a healthy skepticism for others touting stocks and analyst up or downgrades. The history of the markets should tell you that no one can tell consistently where the markets are going from here. Every year the market produces a fund manager wizard who got it right this year. And without question they will return to the mean in short order, just after everyone has sent them their money.

Perception is a construct—it is something that is happening inside your brain. We attend to a very small subset of that sensory information, which we weave into a complete story by adding confabulating pieces as needed. The result is a story that is largely fiction, but it makes us feel we are right, and Mr. Ego is satisfied.

If, however, we understand the limits of our perceptions, then we will not overly rely upon them. Instead, we simply see what the market is doing now, and rely on reality, instead of our likely faulty perceptions recreated from limited sensory input from our past reconstructed memories that create a narrative our ego needs to follow to be right. Read that again once just to let it sink in.

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.