Traders are often advised to approach trading as a business. That’s a “good idea” but difficult to achieve in practice. Why so?
The cerebral cortex is the “smart “ part of the brain. All mammals have a cerebral cortex, but the size, in percentage terms, varies. Your cat’s brain is about 3% cortex. Your dog’s brain is about 6% cortex. The human brain, on the other hand, is 83% cortex.
That’s why, even though it is around 2% of our body weight, the brain uses 25% of the oxygen we consume and 70% of the glucose. In terms of brain function, a business-like mentality is cortically dominant, but in trading that dominance can easily shift.
YOUR INSTINCTUAL BRAIN
While only 17% of our brain is emotional and instinctual, that part is actually in charge of our survival.
Our Instinctual Brain has the power to literally disconnect the telephone line to the cortex when it senses danger, and then take charge of all behavior. This shift in control can occur in about 30 milliseconds; 10 times faster than an eye blink.
The reason we are wired like this is that life-threatening danger is usually some sort of ambush or sudden accident, where spending time in cortical deliberation would put us at a disadvantage.
TIME COMPRESSION
Traders are risk takers. While the risks active traders take (the risk of ruin) are similar to normal small business risks (small businesses frequently fail), they are time compressed and that makes them qualitatively different for the brain than normal business risks.
Whereas a small business might take 3-5 years to fail, an active trader can do significant damage to one’s account in just a few minutes.
For your Instinctual Brain, trading actively is like jumping out of a foxhole before the bullets stop. Your cortex knows that you have to make the leap because if there is no real risk, there is no possibility of reward. But your Instinctual Brain thinks you are crazy.
BOTTOMLINE
If you have been ambushed in your trading and taken painful losses in the past, your Instinctual Brain has been conditioned to view your trading as a danger to your own survival.
Traders mistakenly refer to this neurological struggle as ‘self-sabotage.’ It’s actually your Instinctual Brain trying to save you from yourself, while you resist that intervention.
THE SWEET SPOT
When it comes to risk and reward, there’s a “Sweet Spot.” Unfortunately, the Sweet Spot is not something that can be found in a book on the mathematics of Risk and Reward. Rather, it’s the amount of risk that your individual brain can tolerate before losing cortical dominance.
If you find yourself at odds with yourself in your trading, I offer a free 15-min consultation.
Learn more about Dr. Reid’s work at DayTradingPyschology.com
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