Janice Dorn, MD, PhD
Neuropsychological Trading Coach
Janice Dorn, M.D., Ph.D., has been a full-time futures trader since 1994. Doctor Janice holds an M.D. in psychiatry and is board-certified by the American Board of Psychiatry and Neurology in general psychiatry and addiction psychiatry. She holds a Ph.D. in brain anatomy. A graduate of Coach University, she is a pioneer market psychiatrist and financial neurobehaviorist. Doctor Janice has written over 500 articles on the financial markets and coached over 600 traders worldwide. She is the Global Risk Strategist for Ingenieux Wealth Management Group, Sydney, Australia.
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Nothing is more difficult, and therefore more precious, than to be able to decide...Napoleon Bonaparte
Trading and investing are all about making decisions. Traders trade their money and their beliefs against other traders. Markets move because millions of people are making decisions, and millions of people are making decisions because markets move. Thus, volatility is the result of millions of people making millions of decisions every day. This week’s Trading Wisdom is an introduction to the complex and fascinating area of decision-making. I will start with the basics and take you further into this over the next few months.
Decision-making in the financial markets is compounded in difficulty by the fact that the markets are a complex adaptive system. They are not entirely random because strong trader and investor emotions create trends. They are not entirely efficient because there are too many people making decisions based on poorly conceived opinions. All one has to do to see this in action is to go into a live trading room, such as the one in www.trending123.com. If it were not for the steady hand of John Lansing, the situation would erupt into chaos due to the reality that hundreds of people in that room are each making hundreds of decisions based on their individual core beliefs. When we add the media, breaking news, e-mails that come hurling onto our screen during trading hours, the financial wire services, and the slew of rumors and deceptions, it is clear that the task of sorting out and filtering can be almost totally overwhelming for many.
The brain uses two major systems to make decisions. One of them is well-known to subscribers of www.trending123.com as the rat brain. To review, this is the area of the brain that lies deep inside the middle section of the brain. It is a primitive brain that uses extremely rapid processing. This is the part of the brain that acts on instincts, hunches, tips and anything that looks like a hot deal now. The rat brain is primed for instant gratification and runs on the chemical called dopamine.
Those of you who have been reading the Trading Wisdoms for a while know that dopamine is one of the major brain chemicals that is associated with pleasure. Dopamine floods through the rat brain when it comes in contact with anything that might be an instant reward. Las Vegas is a dopamine paradise, and its casinos are a kind of dopamine bathtub, since the flashing lights, clanking money, showgirls and everything about a casino floor is set up deliberately to “prime” the rat brain to go for all the gusto it can get. The rat brain decides immediately to do something. It does not think logically, and it makes up its mind quickly.
Additionally, the rat brain is not in touch with its own feelings and emotions. If you ask it why it did this or that, why it took that particular trade without any preparation or planning, why it entered a position when it did or why it took profits too soon, it cannot tell you. It is akin to asking someone why they met in Vegas, fell in love in one hour and got married the next day. They don’t know. It just happened. It was pure chemistry.
The other brain area involved in decision-making is quite different from the rat brain. This is called the new brain, named because it has grown up over the rat brain as the cerebral cortex was developing. This is the logical, rational, thinking part of the brain. It acts slowly in a calm and reasoned manner. It has the ability to contemplate itself. When it looks at what the rat brain did (meeting, falling in love and getting married in two days, for example), it considers that to be just plain crazy. When it sees how a trader took a “hot tip” from someone who wrote or spoke with authority, then played that tip with his/her hard-earned money, it considers that to be equally crazy.
The new brain has a huge job to do because it is bombarded constantly with “grab for all the gusto and grab now” messages from the rat brain. It is all the new brain can do on a minute-to-minute basis to keep the rat brain under control. Thus, just as traders are waging war with each other every trading day, the brain of each trader is waging war with itself. Please take a couple of minutes to think about this and how it applies to you.
With the massive amounts of information that bombards traders in the course of a day and without a clear trading strategy and plan, the rat brain wins. This is called default, and the rat brain is the default neurobehavioral system for decision-making. Thus, in conditions such as stress, confusion, anxiety, fear, greed and uncertainty, the rat brain will always make the decision because the new brain is not able to act rapidly enough.
Please take some time to review everything I have written above, since there may be a quiz before we proceed! Seriously, try to get a grip on your brain and behavior during market hours. As we move through this topic, I will describe to you ways you can harness the power of your rat brain to work together with your new brain to make you a consistently awesome and aware trader and investor.
Remember, your rat brain is out to get you.
Until next time,
Good Trading and Brain On!
Janice Dorn, M.D., Ph.D.
janice@thetradingdoctor.com
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