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This Brain Tweak Could Dramatically Improve Your Trading » Learn To Trade

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Imagine if you could insert a plug into the back of your head and upload a piece of software code into your brain that would allow you to trade like some of the all-time best traders? Well, unfortunately we do not have the capability to upload software and upgrade our brains instantly like Neo could in The Matrix. But, there is a very profound lesson here that I want to teach you today, about how you must think and act if you want to make money as a trader.

What the best traders in the world know, whether instinctually or through trial and error (experience), is that your brain can trick you, so well in fact, that you won’t even be aware it is happening. Essentially, what you need to do since you cannot upload a new program like Neo and become part robot, is train yourself to use your more advanced and more highly-evolved thinking abilities so that the more primal brain processes do not take over and ruin your trading.

First, you must understand these two brain systems:

Our brains are composed of different pieces that serve different purposes. Some of the pieces serve our more primal needs, like telling us we need food, love and other rewarding activities. Those are the oldest pieces of our brain, and they also are the ones that get first crack at most decisions, which is not always good for trading purposes. Most traders tend to let these older brain pieces run the show, even if they are unaware of what’s happening. For example, have you ever experienced the feeling of looking at a chart that’s running in one direction really aggressively, and your heart starts beating faster because you want to enter a trade in that direction? That is an example of your primal brain areas taking over.

Our brains basically serve two purposes; primitive ones like fight or flight, rewards / urges and more modern ones like planning, math, thinking, etc. As traders, it’s critical that we learn how to use both brain functions in conjunction to achieve optimal outcomes.

Reflexive brain

Paraphrasing Jason Zweig in his book, Your Money & Your Brain – How the New Science of Neuroeconomics Can Help Make You Rich: The Reflexive brain system are the older pieces of the brain I was referring to above. The reflexive system works so fast that you often finish responding before the conscious part of your brain realizes that there was anything to respond to! An example of this is swerving to avoid a hazard on the highway before you could even identify what it was. The reflexive system gets first crack at making most judgements and decisions, which as I said above, for a trader this is usually what leads to disaster.

So, the reflexive system is all about emotion and intuition. Which, I am not saying is ALL bad, indeed, I’ve written articles on using a trader’s intuition. And as we will see later, one of the keys to trading success is learning how and when to use your reflexive trading intuition, and when not to.

Reflective brain

The Reflective brain systems are like the counterweight to the reflexive system. This function largely resides in the prefrontal cortex; which lies behind your forehead and is the most advanced and recently evolved portion of your brain. Here, neurons that are intricately connected with the rest of the brain draw general conclusions from scarps of information, organize your past experiences into recognizable categories, form theories about the causes of change around you, and plan for the future.

The reflective system is used mainly to tackle and solve more complex problems like “Is my investment portfolio sufficiently well-diversified?” or “What should I get my wife for our anniversary?”, according to Zweig.

Too much of anything is bad for you

As the saying goes, too much of anything is bad for you. When it comes to your brain and trading, using the reflexive side too much OR the reflective side too much can lead you down a path of consistent losses.

We all are familiar with what happens when we use the reflexive brain systems too much; you become emotional, heart rate increases, you do stupid things like trade too much, risk too much, etc. etc. Basically, when acting on your first impulse, as most traders do, you are using your reflexive brain system – and if you only rely on your reflexive brain, you’re essentially gambling, not trading.

When it comes to the reflective brain system, you might think that too much of it couldn’t be bad, right? Wrong. You CAN (and probably often do) think too much. You can over-analyze the market, I’ve written an article about analysis paralysis in trading and how traders often ‘freeze up’ in the moment when they see a good trade, they think themselves right out of it! Another reason why reflecting too much is dangerous is because you can convince yourself you are right about a trade, to the point where you want to bet your whole account, which obviously is extremely dangerous and leads to disaster.

As Jason Zweig states in his previously mentioned book:

“Although doctors get a bad rap as investors, in my experience engineers are worse. That may be because they are trained to calculate and measure every possible variable. I’ve met engineers who spend two or three hours a day analyzing stocks. They are often convinced that they’ve discovered a unique statistical secret that will enable them to beat the market. Because they have squelched their intuition, their analysis fails to alert them to the most obvious fact of all: There’s always something to measure on Wall Street, which spews out a torrent of statistics on everything under the sun. Unfortunately, at least 100 million other investors can view the same data, taking away most of its value – while, at any moment, an unforeseen event can blindside the market, rendering anyone’s technical analysis at least temporarily useless. “

How to trade like you’re half man, half machine:

To succeed in trading, you need to be half man, half machine, so to speak. Robots are cold, emotionless, binary, objective – more like the reflective system in our brains. Humans are full of feelings, ideas and emotions; which stems from our reflexive system.

So, the trick becomes utilizing our brains the best way possible, and not letting one aspect of our brain over-power another.

Take exercising for example: You may FEEL emotional about getting into better shape – you want to do it, you want the result that the hard work brings. However, the act of doing the work, the sweating, the discomfort, even pain, is too much for many people to consistently handle, so they give up the long-term prize to temporarily feel better. However, the worst part is, if you just push through that early discomfort and continue to be consistent, you will eventually start to enjoy the pain, so to speak. Once you get yourself to this point, you are using both brain systems together. The reflexive part of your brain is being rewarding not from inactivity, potato chips and TV, but instead from endorphins, strength, fitness and overall better health – this was something you planned and used discipline and commitment to follow through with, which stemmed from your reflective brain systems.

Here’s the main trading take-away:

STOP giving into the short-term temptations of ‘fast-money’ by over-trading and over-leveraging your account and not sticking to your trading plan – you are using the reflexive system too much! STOP entering a trade or what you think is a trade straight away without double checking your trading plan.

START using your reflective brain to plan things out, understand that consistently and discipline now will pay off LATER and that you won’t get rich fast or at all by always acting solely on your first impulse in the market. START using a trading checklist to double check any trade you spot against your trading plan. Take a deep breath and think through what you’re about to do before you push the buy or sell button (just don’t think TOO much ;)). After a trade ends, take a day off, step away from the computer screen. Pre-plan this and write it out and force yourself to follow it every day. Do use your trading gut feel, just make sure you combine it with your reflective brain system, so it doesn’t run rampant.

Conclusion

In the Matrix, Neo knew something was wrong in the beginning; he figured out he was stuck in the matrix that was causing his brain to be flooded with feel-good computer simulations that over-stimulated his reflexive brain system, which was keeping everyone obedient to the architects of the matrix. Neo wanted more though, he wanted the truth, and when he finally woke up from the matrix he was then using his reflective brain system in addition to his reflexive system, and that is when he really flourished.

You must be like Neo in the markets, with your trading. You must realize that if you are not proactive about it, you will naturally end up using your reflexive brain systems too much, and this is indeed what most traders do and why they lose money.

You must ‘unplug’ from the ‘Matrix’ that is acting on your first impulse and just following your urges and what ‘feels good’ in the market. You cannot make money trading this way. It’s hard to over come at first, but just like exercise, it gets easier and more rewarding over time, it becomes reinforcing. To learn more about this and to get started with a plan of attack that will get you on the right path, check out my advanced trading course for more in-depth training and information.

What did you think of this lesson? Please share it with us in the comments below!





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