Human’s brain was formed in the conditions very different from the ones traders have to work with now. Many decision-making patterns characteristic for our brain, do more harm then good under the pressure of the market. Here are some examples of how the deep mental needs of a trader can lead to losses.
I want to enjoy it
The system of human instincts works on “carrot and stick” principle. For the correct action (ate, warmed up, etc.), a person is encouraged by the release of “hormones of happiness” serotonin and dopamine, and for the wrong action – by pain and the release of the stress hormone cortisol.
Therefore, in the "default" mode, the human brain is always looking for the opportunity to receive the next batch of joy and happiness. If a trader managed to get a tangible profit from the transaction at least once and felt euphoric, then his brain has already built a logical chain: “opened a deal – enjoyed it”. A similar connection is formed in people who are addicted to gambling.
Moreover, the complexity of the analysis, as a rule, is simplified, and one, most striking fact is deposited in memory. For example, "the deal was in trend."
And now, as a trader, in a pleasant anticipation, he opens a new deal with a trend stock, not fully realizing that he is doing this, not being guided by analysis or strategy, but only in order to again feel the joy of easy profit.
I want to recoup – I'm not ready to put up with a loss
Let’s imagine that instead of the long-awaited profit, the trader receives a loss. Then another one. The anticipation of joy is replaced by bewilderment: “What is happening? I did it all before!”. And a small loss on your account scares you less than the prospect of looking stupid in the eyes of friends and relatives, whom the trader has already managed to boast of his first successes.
Now a profitable deal for a trader is no longer about profit – it’s all about pride. A way to cure a wounded self-esteem. Justify yourself. In this state, the brain does not have time to think about potential profitability, evaluate the risk / profit ratio and do other minor things. The main thing is to make profit as soon as possible and return to your comfort zone. And to make profit, you need to open another transaction. The subconscious mind seems to drive the trader to take action, even if the market conditions are poor.
Fear of missing an opportunity
Let us return to the fact that the brain often simplifies the context of a successful transaction to some simple idea, for example, a “deal by trend”. Sometimes, especially after a couple of missed trading opportunities, the trader is seized by the fear of losing profits. This is especially true with a negative account balance. The trader begins to show excessive activity in the search for patterns and signals, switches to lower timeframes, and too often updates the charts.
It is logical that if there is any doubt about the advisability of the transaction, it is better to refrain from active actions and observe from the side. But fear of losing profits turns this logic upside down. The slightest hint of a “deal by trend” becomes a powerful incentive to open a position. The subjective perception of the risk of the transaction is less painful than the prospect of looking after the “departing train.”
Self-discipline in this case is extremely difficult, because periodically such "trend deals" are really implemented, confirming the false trading stereotype. At the same time, the increased nervousness of the trader does not allow one to properly concentrate on other market factors that influence the situation.
I want to avoid pain. Logical loops
To suffer losses over and over again is an unpleasant experience. However, any trader once falls into a series of failures, which can be very painful. At the same time, the subconscious mind is trying hard to protect its carrier from negative emotions, offering logical solutions from its point of view: eat chocolate bar (get a dose of endorphins), take a break from trading, complain to a friend about problems, buy something for yourself (a popular female life hack), sleep and etc.
Under the influence of consciousness, more adequate offers may appear: take training courses, search for “working” trading strategies, and pay attention to other financial instruments. However, all this is a search for quick turnkey solutions, while successful trading involves a large share of personal market research.
The market is constantly changing at the level of small but significant details. Depending on the market sentiment, the same trading signals can be used in completely different ways. Without deep involvement in market surveillance, these differences are very difficult to catch.
Increased stress levels make it impossible to concentrate on the market. Under stress, the human body is prone to run or fight rather than indulge in deep thought and creation. As a result, the trader remains at the level of surface analysis and becomes hostage to numerous "logical loops".
For example, a trader closed a deal with a profit of 2%, and the price rose another 1%. The analysis is carried out, the decision was made the next time to hold the deal longer in order to increase profits. The next time the trader held the deal longer, but the price rolled back, and the deal closed at a stop loss. The analysis is carried out, it was decided to close the deal with a profit of 2%. And so on in a circle.
There are a lot of examples of such loops, but they all boil down to the fact that the trader makes the same mistakes over and over again and suffers losses. Being in such a state is quite difficult to look at the situation from the side and return your trade to a constructive direction.
I want to avoid pain. The final
Due to logical loops, dissatisfaction with their results, moral exhaustion can occur. The trader no longer understands how to trade and what to pay attention to, but continues to methodically open and close transactions, trying to get out into positive territory.
The brain is increasingly protecting its carrier from psychological trauma, trying to distract it from trade and switch to something else. Concentration drops, losses increase.
A deadlock forms in the subconscious: there are no opportunities for profitable trading, but it also does not work to persuade the mind not to trade. Then the only right decision is formed – to lower the deposit to zero in order to avoid further stress. From the point of view of the subconscious, this is an absolutely justified step to relieve mental stress.
And now the trader is increasingly thinking about the all-in transaction. Either he quickly becomes rich and justifies all his torment, or he loses his deposit and finally can rest and relax. Sooner or later, the trader succumbs to this desire, and for one or two major transactions loses the balance of the deposit. There is no more money, but the series of setbacks and torment ended there. The brain successfully protected its owner from pain.
What to do to avoid emotional trading
In this review, the main emotional reasons for opening deals are described as if in chronological order, but in fact everything does not necessarily happen that way. Often, really good thoughtful deals alternate with emotional decisions, reducing the final financial result.
It is difficult to do something right, without clear guidelines. First of all, in order not to lose money due to ineffective mental stereotypes, it is necessary to have clear criteria by which each transaction is opened. The more formalized the strategy, the easier it is to not succumb to subconscious emotional impulses.
Build your collection of situations in which you can earn and use it. Provide clear recommendations on the amount of funds used in each standard transaction. Observe all new experimental patterns from the side, or use the minimum possible trading volume. Avoid the “guessing game” and do not give the brain an opportunity to receive a dose of endorphins from an accidental gain.
Loss or profit from a random transaction is equally harmful to the trader. A large loss causes a strong desire to recoup, and a large profit creates a dangerous precedent at the level of thinking – the brain begins to think that you can always win this way.
Educate your mind. Remember that despite the full power of the intellect of modern homo sapience, some part of it is always guided by instincts and feelings. If, after opening a transaction, you suddenly realized that you were in a hurry and made a rash decision, close the position immediately, regardless of its result. This will teach the subconscious mind to refrain from dubious trading ideas and not expect that its conscious part will give him the opportunity to play a "guessing game".
If the deal reaches stop loss, quickly and calmly fix the loss if the fundamental drivers are no longer relevant. The brain will get used to such a model and the next time it will be much easier for you not to postpone the loss.
Track your psychological state when you are in front of the terminal. Do not be lazy to ask yourself questions: "How do I feel? What emotions do I feel? Does this deal really bode well or did I just get bored? Is my attention concentrated now, or are my thoughts constantly switching to something else? Should I make a decision right now?”
If you are a supporter of active trading, you can keep your personal psychological diary. It may include a description of your emotional state during the trading day, when opening a transaction and in the process of managing it. When keeping a diary, you can see your most common psychological mistakes, as well as track those conditions in which it is generally better not to make any decisions.
You can also come up with your own additional rules that will allow you to approach trading more carefully. This can be a list of conditions in which you do not approach the terminal (for example, fatigue, excessive excitement, etc.), as well as special exercises and techniques for relaxing and stabilizing your emotional background.
Strive to manage not so much your own capital as yourself. If you can successfully follow this difficult recommendation, then a stable profit will not take long.
Author: Kate Solano, Forex-Ratings.com