To simplify we can say that it causes us to flee, or to attack, when we are in danger. The brain needs a very fast system to make effective decisions in the event of a threat and the amygdala comes into play before other more sophisticated brain structures such as the neocortex.
Gonzalo G. has written me an email as a result of the entry of uxio in which, among other interesting things, he raises a question about the management emotional on the stock market.
The idea is: Can you remove the emotional part of trading?
Let’s start at the beginning and see together if we can come to any conclusion on that subject.
Why would we want to eliminate the emotional part? Well, first of all a person who is trapped by fearwho is afraid of losing, who is afraid of being left out of an operation, who is impulsive… perhaps she makes decisions that are not in her best interest, but in favor of her emotional part.
How is it that certain emotions can hinder our trading? The mechanism is simple. Our brain is structured in differentiated parts that are responsible for executing certain functions. Some of these parts we have in common with almost all other animals, for example the amygdalawhich is responsible, among other things, for helping us survive to threatening stimuli.
You are walking through a quiet forest and suddenly you hear a branch break behind you, immediately your heart beats, your pupils dilate and your muscles tense ready to run. Then you turn around and see that it is a fawn and everything returns to normal… That first response has been generated by the amygdala which has given the order to flood your blood system with a series of hormones such as cortisol and the adrenalin.
The recognition of the sound source as a fawn, and the “non-dangerous” label, has been done by other parts of the brain including the prefrontal lobe and the neocortex that use slower circuits.
It is important, from the point of view of survival, that you can make immediate decisions and not reasoned in the face of threats. There is no point in waiting quietly to see if the source of the sound is from a fawn or a ferocious predator. You need to be ready for action and in fact this is what the amygdala does. Then your higher cognitive processes take care of reassuring you if this is the case.
When you are trading in the market and you feel fear, your body can act in the same way, it blocks your perception, makes your heart pound and the decisions you make can be to fight or to flee. If, for example, you have entered a trade and the market turns against you, adrenaline runs through your veins because you feel that you are about to suffer a loss, the price approaches your stop, takes you out of the trade and takes your money, you just got attacked, so will you fight? Or will you stay so calm because you know that the result of any operation taken individually is not representative?
That is the challenge. Emotion will always be present in trading. We are human and we feel. We have a set of fantastic structures that have allowed us to survive and that allow us to experience the world in very sophisticated ways. The problem is that we are born without an instruction manual and we have to learn on our own.
If we have grown up in a well-structured family, we may have developed a fairly balanced relationship with our own emotional responses. If, on the other hand, we were born in a complex and unstructured environment, without optimal reference models, if one of our parents or guardians has not been able to deal with their own emotional responses in a balanced way, perhaps our capacity is diminished.
My point of view is that there will always be an emotional part in us. A centered, balanced, calm person is feeling certain types of emotions, it is not that they are insensitive, it is rather that the emotions that they embrace are better to the extent that they favor the achievement of their objectives: from the center one can make more informed decisions. correct.
When we are operating it is important that we free ourselves from the paradigm of fear to avoid that our amygdala kidnaps our reason, as it says Daniel Golemann. Trading without fear is not the same as trading without emotion. What we want is to understand how we generate fear, what we do with our minds to see the market as a threat. You cannot trade if you are afraid. You can, but you shouldn’t because you simply would not be acting in your best interest by putting yourself in a situation where decisions will be made by your amygdala and not by your reason.
How to eradicate fear from your operations? realizing that there is no threat some. That the market is not going for your money, the market unfolds indifferent to your position. It is not a predator that is after you, but rather a flow of opportunities that only allows you to participate assuming a risk of loss because the result of each operation is uncertain and will always be uncertain.
If you understand this, if you have truly come to understand that in order to find out whether or not an investment opportunity is favorable to your interests, you have to pay a price in the form of a risk premium, and you are managing that risk according to the parameters established by your money management (basically you are assuming a risk of less than 2% of your capital) then there is no threat. It does not matter if the market goes in your favor or against you in a certain operation. He will do what he has to do. If he takes you out of the trade, nothing happens because that was an option that you were embracing. In that case you will focus your attention on finding another opportunity and managing your risk.
If, on the other hand, you continue to think that the market is after you, that it is something personal, that it has a mania for you… there you are still in the paradigm of fear and YOU SHOULD NOT OPERATE. Do not operate from fear, it is absurd to think that you can win if you are afraid. You can not. You won’t make it. That path leads you to the precipice, to permanent frustration and ruin.
Suffering, unlike pain, is something we produce with our minds by interpreting certain information as unfair, inadequate, or contrary to our expectations. Change your expectations. Can you lose on any trade? Of course. You can lose or you can win. Nobody knows. No one. So if the possibility of loss is real, why worry about losing or not? The path is not that. The way is to have a system with positive hope and limit yourself to applying it systematically. You don’t have to take revenge on the market, you don’t have to run away from the threat, rather you have to understand that to win consistently, the way is to get out of the threat paradigm and operate systematically with the odds in your favor.
My point of view is that you can develop the necessary center by accepting that there is no threat. In order to win you have to participate, when you participate you risk, if you risk you can lose, losing is part of winning, if you have the odds in your favor, each loss brings you closer to a profit.