The Psychology of Trading

Having read the last few months some outstanding post on various topics I also noticed that during crunch times – just think back to the week pre ADCOM meeting - a lot of emotions come in. I am not speaking of the obvious toxic emotions of put downs and insults. The emotions I want to speak about are the emotions we generate when we try predict the share price or the specific dates. Predicting the share price or a specific date, when well-reasoned and supported by facts is certainly useful when planning and executing trades – so obviously I am not referring to the post of Wombat, Ecoool2 and other well-reasoned posts.

Fear and Greed come in many disguises. The come in hope, anger, euphoria, frustration etc. Whilst this is all normal to experience it is not something one wants to foster, especially when it gets to the pointy end – just ask those traders who sold during the 30% drop recently. Fear and Greed make it also difficult to hold shares with great upside potential. Ecoool2 said clearly, that one of the more difficult things with shares who have a massive upside potential is, to let your profits run.

So what happens when we generate those emotions? When we are in a calm a resourceful state our prefrontal cortex in the brain lights up. The prefrontal cortex is mainly responsible for planning complex cognitive behavior, personality expression, decision making, and moderating social behavior. However when we generated emotions of Fear and Greed the Amygdala becomes the main actor. The Amygdala is not capable of reasoning and planning and its only function is to react – fight, flight and freeze. Physical symptoms, when the Amygdala is active, are an increased heart rate and blood pressure and stimulated release of certain hormones.

The Amygdala has an important evolutionary function. Just imagine you step in front of a sabre tooth tiger. You don’t want your prefrontal cortex in charge and analyzing the situation and admiring the animals coat and beautiful teeth. However, at the same time you don’t want your Amygdala to light up when writing a post on HC or planning a trade.

It is impossible control the Amygdala directly. However, we can influence our parasympathetic (dorsal vagal nerve) and sympathetic (frontal vagal nerve) nervous system, which can influence our brain activity. The dorsal vagal nerve is very active when our Amygdala is in charge and our frontal vagal nerve is most active when the prefrontal cortex is most active (of course the vagal nerves have other functions too). For us that means, we should stimulate the frontal vagal system as much as possible.

The frontal vagal system is stimulated and influenced through conscious breathing (longer exhalations), breaks, diversions and humour. The breaks and diversions ideally come through exercise. The dorsal vagal system on the other hand is stimulated through past traumas or life threatening experiences. Fear and emotional stress are known causes to trigger the dorsal vagal nerve. Losing one’s hard earned money certainly falls into that category.

My understanding is, that posting rocket GIFs, predicting pricing and dates can cause disappointment when the expectations are not fulfilled. Engaging in senseless arguments with trolls leads to frustration. Watching the daily price fluctuations causes stress or elation. All triggers and stimulants to the dorsal vagal system. So what can we do instead?

Go out for a walk, enjoy the company with your loved ones, read a good book, watch a movie, cook some delicious food, savor a fine wine, do some exercise, be kind and rational, reflect etc.

All the Best for the coming week!