How does the trader's brain work? Neurobiology of the speculator
How to become consistently successful in trading? To answer this question we must first understand what makes millions of traders unsuccessful - what makes them lose money? What prevents them from analyzing the market and placing orders correctly? Why do they succumb to fear, gambling and go against the rules? trading strategy and money management?
In this article you will learn how the science of the human brain - neurobiology - explains these processes, what happens at the subconscious level, and who intercepts the control of our behavior.
What does a trader think?
So, let's begin. The first thing to know is "what are we thinking". Where, in our head, does market analysis and the decision to open an order or to wait for a while take place? This is responsible for prefrontal cortex.
This part of the brain evolutionarily developed later than all the others, which today we call the subconscious mind. Therefore, it processes information five times slower than all other parts of the brain, and requires unimaginable amount of energy for its activity. This is our rational brain, the analytical department, which compares, analyzes, and plans the future based on past experience; this is also where the internal dialogue takes place.
In the prefrontal cortex, the trader analyzes the market and decides on further actions. This is where all knowledge about trading is retrieved from memory, which provides algorithms for decision-making.
The power of habit
When a trader has repeated a successful algorithm several times in a row, the actions developed become a habit, and the reins go to another part of the brain, which is called "basal nuclei". This part of the brain is responsible for finding clear sequences of actions and their execution, or in other words, habits.
While you are learning to drive a car, you use the prefrontal cortex, i.e. you do everything consciously. But as soon as you practice a bit more, driving becomes a habit, and you drive without thinking, while being able to talk or perform some other, parallel action. That's what the basal nuclei do. They are capable of noticing such long sequences that our prefrontal cortex may simply not be aware of.
Neural networks are formed in the basal nuclei, which are responsible for certain skills, and these, in turn, are combined into more complex circuits. It is easier to look at this working structure with an example. Imagine riding a bicycle. One neural network is responsible for maintaining balance, another for pedaling, a third for pressing the brakes in time, a fourth for maneuvering, and so on. When you get on a bicycle, these neural networks merge into a circuit that you might call "riding ability," and it works automatically without requiring your control.
Such neural networks can come together in different combinations, creating other circuits. They are called habits, which are very often stronger than our self-control, and then we say that the habit turned out to be stronger. The more times we repeat a sequence, the stronger it becomes.
Habit is the cause of trader's failures
This is where the first the reason for many traders' long-term failures - when the prefrontal cortex and basal nuclei meet. Our rational brain is only 4% of the total volume, it analyzes information slower than the other departments by several times and it also consumes an incredible amount of energy. At the same time it is very capricious.
To understand how much energy it takes to think consciously, imagine that you and I are walking up a hill. Suddenly I ask you a question along the lines of, "Tell me, dear man, what are your plans for the future and what role do you see trading playing?" To answer that question, your body will stop and you will stop climbing for a time of reflection. All the energy you need for that climb will go into just thinking about my question!
Thinking processes that require looking into the future or prioritizing, which also requires both imagining the future and comparing it with past experiences, can simply drain our strength in an instant. If you do intellectual work, you probably know what physical exhaustion is from strenuous mental activity.
Your analytical work in parsing the market, especially in start of a trader's careerIt takes an enormous amount of energy. Your prefrontal cortex overloads and you lose concentration. And that's where your basal nuclei take the initiative, just waiting to come out. As soon as your awareness dulls, the automaton kicks in. And what automatic machine do most traders set up? Most often a long series of failures!
Just imagine: All the time you were learning, your actions resulted in losses. You were using a failed algorithm that resulted in losing money every time, and your basal cores were fixating on that circuit. And now, as soon as your rational part gets tired, the automaton triggers, leading to failure. You seem to have done everything right, and then you just watch your positions go into deficit, and you understand everything, but you can't do anything about it - you just look at it in a daze, or you start to panic.
Who distracts you from trading?
The second factor. In addition to the enormous amount of energy that devours our rationality to work, it is also constantly distracted by external and internal factors. Of course, there is an effort of will, which returns our concentration to the market analysis, but it requires simply titanic efforts! At the same time, the amount of this will melts away exponentially. If you were able to regain your attention the first time, for example the smell of food distracted you, but you didn't go to the kitchen and continued to analyze positions, the second time it will be much harder to switch from thinking about food. All of these distractions are responsible for anterior cingulate cortex.
This part of the brain is a part of the survival system, and it was formed in the following situations - our ancestors were walking in a familiar area, everything was as usual, but then something rustled in the bushes, or our nose smelled a predator, or our eyes noticed a sharp movement nearby... Immediately the focus of attention was switched. As it is a system of survival, the brain assigned the highest priority to such events. So it turns out that times have changed - you're sitting in your apartment, where everything is safe, analyzing the market, but as soon as the phone rings or a notification pops up that you have a message on social media, the anterior cingulate cortex switches attention to the sudden change in the situation and assigns it a high priority. How many distractions do you think can manifest while you're trying to do your trading? And that just drains your energy and turns on autopilot.
This shows the capriciousness of our prefrontal cortex - not only does it need a lot of energy, but it also gets distracted by everything and has to waste energy to get back to the right thoughts.
Gambling, adrenaline, or why it gets boring?
Let's talk about the hormones of success and failure. The capriciousness of our prefrontal cortex also manifests itself in the following way: in order for it to simply function, it needs a certain level of arousal. It is controlled by hormones: if this level is too low, we won't think or act, which can be called laziness; if we are very excited about something and the level of hormones is off the charts, then thoughts run wild, there is no concentration, actions are chaotic and inconsistent. Therefore, a trader needs an average level of excitation of the prefrontal cortex - somewhere in the middle between the first and second states - to work properly.
So, we need two groups of hormones for motivation. The first group gives us the impetus to act through fear. If we lack motivation, once we think that our inaction or inattention in trading will lead us to problems, fear releases adrenaline into the bloodstream, and we immediately begin to think productively and act proactively. However, if we motivate ourselves with fear on a constant basis, it leads to bad consequences for the body.
The second group of hormones motivates us with the promise of pleasure are dopamine and norepinephrine. Dopomin stands out when we take an interest in something new and exciting. For example, trading is something unknown, cool, full of possibilities, wish fulfillment. The promise of such a set of "tasty things" provokes the release of dopomine and the desire to possess it all. That's what makes us learn to trade the stock market or currencies. But when we do the same thing over and over again and trading becomes monotonous, the dopomine level falls down and we start to lose interest in it, and consequently we analyze it inattentively, we move away from TS and Money Management. Thus, we simply unconsciously look for situations which will provoke an injection of dopamine.
Unfortunately, most traders have no idea what's going on in their heads, and even fewer who know how to cope with it all. I hope that my article has shed some light on the veil of your subconsciousness and made you stronger in the fight against it.
Judging by the article, you should not rely on your experience, and it is better to strictly follow the signals of the indicators.
Interesting logic... What part of the article led you to this reasoning?
Experience and common sense are absolutely necessary. If experience was not necessary, then why would you need a trader's diary and records of all trades? Sometimes the trader sees that the system will not work, there will be a loss. This is the experience, although the system gives a signal to enter.
Well, personally I never get upset or freak out when I lose. Forex is a justified risk, there's nothing you can do about it)
Super material. Such a motivating article that it makes me want to understand all the intricacies. Therefore, it is in my bookmarks.
The material is incredibly useful. By becoming aware of how we think, by learning to think as we should (effectively!), by analyzing our mistakes, the trader can achieve success. In addition, this mechanism of thinking is typical for other spheres, which means that a trader can qualitatively improve his life.