Brain based trading involves an awareness of your emotional states, a mindfulness or cognitive recognition of your disposition while trading. In other words you are thinking about how you think. Various disciplines have approached this awareness primarily through meditation. I have reviewed previously how your pre frontal cortex(PFC) works with your emotional centers to calm them and keep them from overreacting based on our primitive ancestors responses required for their very survival. Those primitive responses are innately placed deep in our neurology ensuring our very survival.
Observing your own mental awareness and thought process is a very taxing process, using excessive amounts of energy. Thus few people ever do such a task. It takes deliberate practice and patience to maintain awareness of and achieve a peak level mental state.
Peak mental performance REQUIRES
- Knowing your brain and how it works and
- Being able to observe your brain processes occurring in real time.
Your brain works by either moving towards something or away from something. We walk towards pleasureful events, like food at the dinner table, a romantic engagement, financial gain and positive social interactions. We run from fearful events, like a bear in the woods or the thought of a huge trading loss. Fear is innately ingrained to be more emotional and forceful because in our past it often involved our very survival.
The right ventrolateral PFC acts to put the brakes on your emotions when engaged at appropriate times. When you can engage your director PFC and see yourself thinking and taking action emotions play out from a director/third person point of view. Now you can watch from a objective point of view, merely observing the trading environment without getting emotionally connected.
Admittedly when the market is taking you to the cleaner with wild volatility your emotions can force you to flee just when you should have bought. Damping your emotions when it seems like the world is about to end can be tricky. Even the best of us can at times not contain ourselves and make knee jerk trades we later regret.
Without your PFC engaged your primitive deep brain limbic system, the emotional hub, stays engaged. It often exaggerates threats for your own protection as a survival mechanism. Your amygdala has a low resolution for memories and misinterprets events often in an overaggressive fashion, forcing you to see nearly everything in a negative light. It’s what causes you to run/panic even from a non-survival event, like a falling market.
Being mindful of your emotional disposition takes an incredible amount of energy for your PFC. Energy consumption measured by functional MRI studies of your PFC shows that it is very demanding when we use this part of our brain to dampen emotions and concentrate on reality versus misperceptions and headlines. Thus trading when you are not alert is often a disaster waiting to happen, as your emotions run wild and you succumb to the average retail trader who loses over 85% of the time.
One phenomenal technique I first encountered that is very effective for dampening your emotions when trading is simply naming the emotion your are feeling, sometimes called labeling. If you suddenly get sweaty palms and a racing heart you know you are fearful and experiencing anxiety from a perceived threat. Simply saying inwardly or outright PANIC alert can change the game. By noticing your emotion your PFC can quickly bring you back to reality and calm your fear so you can see your trade more objectively and make the best decision.
Do not think about everything in detail about panic and fear and anxiety. That will accentuate the state rather than suppress it. Just label it and let your brain do its thing.
When your PFC is engaged properly it sends inhibiting signals to your amygdala and adjacent anatomy of your limbic system. It also reduces elevated norepinephrine(excitatory neurotransmitter) and cortisol levels to calm your demeanor. If you want to trade better it’s time to work on you by getting into peak mental performance. Your success truly is within. Work at it some everyday and you will reap the benefits.
Enuf said.