We all know that trading requires a high level of mental strength and the ability maintain some form of rational thought. The problem is that market is not rational. Why? Because humans aren’t rational and humans drive the market, and even the systems developed to make trading rational are also developed by humans. We are emotional beings and therefore so is the market.
Trading is stressful. But here’s the thing, your brain doesn’t differentiate between stressful situations. Rory Mcilroy’s brain doesn’t differentiate between putting on the 18th hole for the Championship or being confronted by a grizzly bear. The brain simply recognises it as a threat, which can have a negative effect on behaviour if not managed properly. The same must be said when trading. It is likely that Mcilroy has developed the ability keep the Championship winning putt in perspective and through practice he has learnt how to manage his emotions in this familiar situation. If he were to be confronted by a grizzly bear he may react very differently. The point here is that self-regulation and emotional management is essential for successful trading, this is what I refer to as ‘managing the mist’, the ability to focus and maintain clarity. It is was all the great traders are able to do.
You are biologically designed to run away from a threat or fight it
You are biologically designed to run away from a threat or fight it. Without this instinctive behaviour the human population would have been wiped out a long time ago! Although the world has changed over the last billion years, you are still stuck with the ‘Fight, Flight, Freeze’ response. We see this everyday when financial experts make decisions. Someone somewhere thought it would be a good idea to print more money to stimulate the market, is that rational?
You will have made a trade and later learned to regret it. In hindsight without the emotion you rationalise your poor decision, vowing never to do it again, only to find an hour later you have done exactly that! This is normal every trader has done it, it is actually part of the process. It is likely that you have reacted to something instinctively without any real level of conscious thought and later reflected, "what the hell was I thinking", yes? Well, you weren't really thinking, the thought process was happing at twelve milliseconds (twelve one-thousandths of a second) i.e. fast! This can also work in your favour when making fast decisions. The fact is there are thousands of other people making these types of decisions around the world creating what we call the ‘economy’.
Several other essential parts of the brain lie deep inside the cerebral hemispheres in a network of structured called the limbic system. The limbic system links the brainstem with the higher reasoning elements of the cerebral cortex it plays a key role in developing and carrying out instinctive behaviours and emotions.
The limbic system is the part of your brain that reacts to the world around you reflexively and instantaneously in real time and without thought. For that reason it gives off a true response to information coming from the environment or the market if you will.
A key player in the limbic system is the amygdala, which has its name taken from the Latin word for almond due to its shape. The amygdala is involved in processing strong emotions such as fear. It has been essential to your survival. Unfortunately this amazing defence mechanism isn't always useful when trading and can manifest itself as completely irrational behaviour or also known in neuroscience as taking the ‘low road’. When this type of stress occurs you will feel a shift in your physiology, breathing will change and your posture will change. It is likely that you are unaware of these changes happening to you in real time as result it will also create the mist clouding your judgement creating the mist.
In order to achieve optimal performance as trader and stay ahead of the market you will need to manage the response to a threat and take the high road.
The high road is much more thoughtful and methodical, albeit slower in its response. When a trader is at his or her best, the low road and the high road are working simultaneously, or you could say combining logic and feeling.
I help traders beat the market by doing 3 things brilliantly: