In a recent post I made the statement that, “No-one starts off their trading career with the natural gifts and talents that allow things to come easily. In fact it’s the opposite – we’re all hardwired to fail at trading.”
Some traders asked for a more detailed explanation about how we’re hardwired so I thought I’d delve in a bit. There’s quite a few things that don’t come naturally to us a traders so it will be across a couple of posts.
When newbies first approach the market there is an internal cocktail of emotional and social conditioning that we have to actively neutralise before our heads are in the right place to follow the most basic of trading rules, which is of course to cap your losses and let your profits run.
Our trouble actually all starts further back in history. Right from the time we are born, we are the proud owners of left-over caveman survival instincts that reside in our limbic brain – our emotional centre. I know it seems weird that I’m talking about cavemen, but bear with me.
Back in the day, life was dangerous and for a caveman it was pretty much defined by uncertainty. Next meal? Uncertain. Coming home unscathed after killing said next meal? Uncertain. Potential attack by crazed Sabre Tooth tiger? Uncertain.
The caveman’s life was dominated by fear. They were always on high-alert for anything out of the ordinary that could pose a danger, which was incredibly useful for them back then because a fearless caveman was usually a dead one. Being fearful was a survival trait.
When a caveman – or any human for that matter – is faced with danger or a perceived attack, the limbic brain takes over. Literally.
The limbic brain actually shuts down our rational brain and pretty much drives the car from there on in. The physical effects of this include an increased heart rate, our breathing becomes shallow and all of a sudden we have the mental capacity of a monkey.
But even though our rational thought processes are virtually useless in this state, physically we’re in overdrive. If you were ever going to massacre a lion with your bare hands, now would be the time.
Fight or flight mode is not quite as useful these days.
There’s not much to be scared of while grabbing some corn flakes in the morning, or catching the train to your job, or earning a regular pay packet, or going home to the roast dinner you have religiously every Thursday night.
However, when faced with the uncertainty of the markets our limbic brain doesn’t take long to flick back to caveman mode. Fight or flight is brilliant when you’re confronted by someone who wants to kill you, but less useful when you’re at a trading desk confronted by a large loss – or even just a move you didn’t expect.
There’s no-one to kill in the market, and nowhere to run; so we end up taking our aggression out on the market. We feel like we have to do something to slay the foe – buy more, sell more, trade more – but we’re doing this buying, selling and trading with the attributes of a monkey on speed.
We’d actually be much better off putting all that adrenaline to use by getting out and going for a run, then coming back to reassess things in a more rational state.
It’s this fight or flight mode that makes having a solid trading plan so important. We need structure and a method to guide us when we’re in over-drive, so our inner caveman doesn’t go wild and trash the place.
If there is a concise trading plan in place, there is a higher authority to turn to that will give you specific instructions to follow.
if you’re interested to read more about the caveman effect in trading, you might also like to read this.
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