How to understand your Brain In Trading?
What does this have to do with trading? Everything. Trading is mental
Your trading errors don’t come from the market , they come from your own perception and reaction about the market information.
Neurons are what transmit information to different parts of the brain. The stimulus starts in the amygdala and then move into the neocortex. Your brain and memory react with past information. These neurons will start to associate themselves to respond. Between stimulus and response there is a space. In that space is our power to choose our response. In our response lies our growth or stagnancy.
Trading examples :
- In trading you will fell the pain that you experienced from that previous loss and that will make you feel afraid for the next decision. You won’t be able to execute once the edge appears in front of you.
- If we had a major win, then these neurons will start to associate themselves to the pleasure that you experienced from those profits.
However, neurons do not have a mind of their own, and they are simply doing their job by transmitting information. That Information can either be right or wrong! We can develop false or negative neuro-associations throughout life.
Examples of bad neuro associative conditioning :
- smokers will associate pleasure to the inhalation of a cigarette, instead of the pain that could be caused by cancer.
- Some people associate pain to falling in love if they have experienced a bad breakup, and the begin to create a negative neuro-association to entering into a new unique relationship.
- Some will associate fear to every dog they see in the street if they have experienced a dog attack But how does all this apply to trading financial markets?
Almost every trader has experienced the pleasure of making a large amount of profits, only for the market the reverse and it becomes a big loss.
The brain will create a neuro-association that will link pain to a normal retracement in price. You will begin to equate a retracement to pain, and thus create a false neuro-association. You are going to close your trades with a simple pullback. It requires a mental process called neuro-associative conditioning. The negative neuro-associations must be turned into positive neuro-associations.
How to change positively my old neuro-associative conditioning ?
- Is the market retracing ? Do not associate this with ‘the market is taking my profits back!’ but rather ‘the market may be presenting me with an opportunity to add to my position’. This is a change in your neuro-associations; a negative one to a positive one.
- Do you have hope when a losing trade runs and you wait it to turn back into profit ? Do you feel desperation when the market is redistributing your profits with one single retracement ? then change that and do the opposite. feel despair when a trade is running in loss and feel hope when a trade is running in profit. This is a change in your neuro-association; a negative one to a positive one.
- Did the market hit your stop loss ? Do not associate this with the pain of losing money, but rather associate it with the fact that the probability of the next trade being a winner will stay because of your profitability. This is a change in your neuro-association; a negative one to a positive one. Do you feel great after a massive win ? then change that and feel protective about what you collected. this is a change
This is a powerful process that is difficult and requires a lot of practice, years ! but it can be used to change almost anything or anyone. Hope this post was helpful.