Understanding your trading brain

By | April 27, 2013

Many readers have asked me the following question:

“what we are watching and what we are doing is totally opposite ?”

“What we would like to act and trade  and we do something reverse than that as soon as we see the trading terminal! ”

“I do plan ,than trade but anyhow it goes unfollowed unknowingly !”

This is a common phenomenon in the loss making traders and let me elaborate what causes this problem and how can one avoid it.

Most traders spend a large amount of time fighting themselves on the path to trading success, often without fully realising what it is they are fighting against.

So what are we fighting against in our minds and why should every trader understand this?

It all starts with Human Brain, All your trading decisions are made with the help of your Brain and if trader understands how brain works will help him solve this puzzle on why we go against our trading plan.

 

The brain works like a muscle.It has 2 sides analytical side and emotional side.

We learn by repetition first and foremost. Once a certain behavior is deeply engrained neural pathways are established, and the behavior becomes automatic. We do not have to consciously think about it any more.Think of when your learn to drive a 2 wheeler or 4 wheeler During your intial phase you need to have a proper combination of clutch and accelerator to move the vehicle in 1 gear and slowly and slowly proceeding to further gears, First few days vehicle will stop due to lack of sync in clutch and gears but slowly and slowly you will master and probably after 6 months you can drive smoothly.

You have repeated the same activity again and again to master it and now it happens automatically, you do not have to consciously think about it any more.

The problem for traders arises when traders have acquired poor trading habits, like overtrading, exiting positions too early, poor risk management, bottom picking, or picking market tops to name but a few.

The brain will automatically repeat a behavior, once it is established. This is true even if that behavior causes you trading losses. If you have made money in the past picking market bottoms or picking tops your brain creates the memory of a positive emotional charge. You will repeat this behavior because your brain now sees bottom picking or top picking as a valid strategy which created a feel good emotion even though from a strategic trading view point this kind of behavior should obviously be avoided at all cost.

Fear of losing causes traders to exit positions too early and the resulting feeling of safety again creates an incorrect association. Your brain will always seek to protect you. It often does so by making incorrect associations lulling you into a false sense of security

This is why we find it so difficult to break poor trading habits and, incidentally this is also why working on your trading psychology should be part of your trading plan, irrespective of whether you are a beginning trader or an experienced trader.

 

A calm mind sees more of the entire picture, while fear, impatience, impulse trading, or over analysing the markets create mental static which throws you off your connection with yourself and with the markets. The analytical side of your brain stops functioning all together and the emotional part of the brain, takes over and which ultimately give losses to trader.
So first and foremost think is to get rid of old/bad trading habits than work on getting the new habbits ingrained in your brain by repeating them again and again  . You will fee better about yourself in general too, I promise you as much as someone who has walked the path and is learning every day.

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