If I were to start a chapter of Overtraders Anonymous, I doubt anyone would come to the meetings. Those qualified to attend would be … trading or engaged in some other risky activity.
This would be the case, even though behavioral-finance research indicates that trading frequency is inversely correlated with returns. And the correlation is quite linear.
The Facts
In a study of 66,000 traders, only the 20% of traders who made the fewest trades per month beat the S&P 500. Among the other quintiles (the five groups of participants arranged by trading frequency), the performance of those who were in the next most active group matched the S&P’s performance. The most active traders underperformed the S&P by approximately 65%.
In the battle for profits, why is it so hard for some of us to slow down, even when our results clearly tell us we should?
It’s All About Dopamine
As in last week’s discussion of our stubborn tendency to sell winners and hold losers, it’s all about the feel-good chemical dopamine.
Dopamine is the brain chemical responsible for our sense of motivation. Not everyone has the same baseline level, however. There is a gene that controls how full our cup is (low, medium or high) and those born with a lesser amount constantly feel the need to boost it. This need is almost a compulsion because dopamine is its own potent reward.
The Trading Trance
What’s the best way to boost dopamine? Identify a potential reward and then go after it. “Just do it.” More dopamine is released from the anticipation of a reward than from actually achieving the goal.
This is what keeps traders transfixed in front of our screens, hyper-focused on price action. I call it the Trading Trance. It’s a dopamine trance; the same trance that keeps slot machine players in their seats for hours on end. Win some, lose some; the real purpose is to self-medicate.
The Bottom Line
If you are overtrading, you may be chronically low on dopamine. Raising dopamine is something that can be done behaviorally (trade more; seek other rewards or risks), with prescription drugs, such as Wellbutrin, or by over-the-counter supplements.
One such over-the-counter compound available at vitamin stores is Dopa Mucuna, made from a bean popular in India. Another more elaborate formulation is called Balance D.
Before you self-diagnose and self-treat, however, consult a medical professional in your area.
