Are humans designed for trading?
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Trading is an intellectual activity. An investment decision is based either on a fundamental analysis or on an interpretation of technical elements (technical analysis). Given the number of losing traders in trading, I therefore ask the question: are humans designed for trading?
As many studies have shown, the causes of trading losses are essentially psychological. Emotions often take over the trader's investment decisions. Decisions then become irrational. Why is it so difficult to fight against emotions in trading? How can you control your emotions? How can you structure your trading to avoid appealing to your emotions?
Trading is an activity that requires reflection. We ask our brain to analyse a situation (technical or fundamental) and make an investment decision on an asset. Should I buy? Should I sell? Should I stay away?
The decision to invest in an asset is made according to several criteria: analysis on different time units, taking into account the economic calendar, integrating economic announcements that have had an impact on assets, reading technical indicators, personal feelings about the assets, analysis read on the internet, trading conditions, etc.
So we ask our brains to analyse all this information and that's what drives us to give in to our emotions. Effectively, the volume of information is so huge that you sometimes feel lost, you don't know what to do anymore. This phenomenon is particularly common among novice traders.
I recently read in an article in Sciences & Vie entitled "Can the intellect assimilate everything?" The answer is obviously no. To prove it, they carried out a test on air traffic controllers. Result: "After a certain number of devices or changes in conditions, they lose control. If the decision-related region of the brain (the prefrontal cortex - executive control region) feels overwhelmed by the mass of information to be processed, then the emotion-related areas are in a state of high activity. To summarize the conclusions of the study, humans are frustrated if they cannot analyse all the available information and gradually abandon the analysis to give way to emotions. Effectively, the brain feels obliged to provide an answer to the questions asked in trading "Should I buy?Should I sell? etc.“
Novice traders are not used to managing, analysing and sorting the amount of information available. As a result, this activates their emotional brain areas. This is what makes them lose in trading.
A good trader (using technical analysis) is a person who can blindly apply his trading strategy (respecting the money management rules) without leaving room for emotions. This sounds simple to say, but few novice traders are able to do it. On the one hand, this is due to a lack of knowledge of the markets and trading in general, but also to a lack of confidence in their trading strategy.
To be able to fight your emotions, you first need to have a solid knowledge base. You must be comfortable with the different chart elements (flag, triangle, H&S, etc.) and with the technical indicators you use (understand how they work). This basic knowledge enables you to reduce the amount of information to be analysed. Effectively, by looking at the numbers, it is easy to interpret them. The same is true for detecting bullish/bearish signals with technical indicators.
This brings us to trading experience. Experience enables you to analyse more quickly and improves your analysis. As I said earlier, there are also external factors to take into account such as economic announcements, analyses seen on the net, your personal feelings, etc. Through training yourself to trade (using a demo account), you learn to manage these different elements. For example, should a bullish/bearish signal be taken into account before a major announcement? Should I take into account my bullish/bearish signal if I think the opposite? etc. Experience enables you to sort these elements more quickly and to know which ones to take into account.
Experience also enables you to consolidate your trading knowledge. For example, we learn that we should not take into account all the bullish/bearish signals that we should understand the trend of the assets (multi-temporal analysis), etc. Experience makes it possible to have concrete cases in mind, which makes it possible to reduce the amount of information to be processed. It is often said that we learn from our mistakes in life. It’s the same with trading. You memorize your most serious mistakes to avoid repeating them. If the case comes up again, your brain then uses your memory to make the decision, which saves it from having to analyse the situation a second time.
Good knowledge and trading experience enables you to manage the amount of information to analyse better, to avoid feeling overwhelmed and therefore making emotional decisions.
To avoid activating the emotionally related part of your brain, several methods are recommended:
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By increasing the number of tools, you increase the contradictions. If you are lost in trading, your emotions decide for you.
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Being interrupted in analysis requires additional effort for your brain to refocus and take into account all the parameters of opening a position again. You are not going to make this effort and make a decision without any real thought. Effectively, your brain tells you "I've already made the effort it's annoying to do it again". So you're going to do less thorough analysis.
Opening a position on a mobile phone is also not recommended. Telephone applications should only be used to cut your positions or monitor your trades. On a phone, there are a lot of external demands and it is more difficult to concentrate.
Trading requires a lot of thought. If this effort is too much, your emotions are activated and gradually take over. Emotions are the trader's enemy. To control them better, you need to have solid trading knowledge and experience in the financial markets. It is useless and dangerous to have a complex trading strategy, you must keep it simple without neglecting the rules of trading (money management, one-way trading). Trading requires concentration, it's not a game.
Humans are not designed for trading because of the mass of information at their disposal but they can adapt to it by imposing certain rules. The brain has a great capacity for adaptation, so use it.
As many studies have shown, the causes of trading losses are essentially psychological. Emotions often take over the trader's investment decisions. Decisions then become irrational. Why is it so difficult to fight against emotions in trading? How can you control your emotions? How can you structure your trading to avoid appealing to your emotions?
Why are there so many emotions in trading?
Trading is an activity that requires reflection. We ask our brain to analyse a situation (technical or fundamental) and make an investment decision on an asset. Should I buy? Should I sell? Should I stay away?
The decision to invest in an asset is made according to several criteria: analysis on different time units, taking into account the economic calendar, integrating economic announcements that have had an impact on assets, reading technical indicators, personal feelings about the assets, analysis read on the internet, trading conditions, etc.
So we ask our brains to analyse all this information and that's what drives us to give in to our emotions. Effectively, the volume of information is so huge that you sometimes feel lost, you don't know what to do anymore. This phenomenon is particularly common among novice traders.
I recently read in an article in Sciences & Vie entitled "Can the intellect assimilate everything?" The answer is obviously no. To prove it, they carried out a test on air traffic controllers. Result: "After a certain number of devices or changes in conditions, they lose control. If the decision-related region of the brain (the prefrontal cortex - executive control region) feels overwhelmed by the mass of information to be processed, then the emotion-related areas are in a state of high activity. To summarize the conclusions of the study, humans are frustrated if they cannot analyse all the available information and gradually abandon the analysis to give way to emotions. Effectively, the brain feels obliged to provide an answer to the questions asked in trading "Should I buy?Should I sell? etc.“
Novice traders are not used to managing, analysing and sorting the amount of information available. As a result, this activates their emotional brain areas. This is what makes them lose in trading.
How can you fight your emotions when trading?
A good trader (using technical analysis) is a person who can blindly apply his trading strategy (respecting the money management rules) without leaving room for emotions. This sounds simple to say, but few novice traders are able to do it. On the one hand, this is due to a lack of knowledge of the markets and trading in general, but also to a lack of confidence in their trading strategy.
To be able to fight your emotions, you first need to have a solid knowledge base. You must be comfortable with the different chart elements (flag, triangle, H&S, etc.) and with the technical indicators you use (understand how they work). This basic knowledge enables you to reduce the amount of information to be analysed. Effectively, by looking at the numbers, it is easy to interpret them. The same is true for detecting bullish/bearish signals with technical indicators.
This brings us to trading experience. Experience enables you to analyse more quickly and improves your analysis. As I said earlier, there are also external factors to take into account such as economic announcements, analyses seen on the net, your personal feelings, etc. Through training yourself to trade (using a demo account), you learn to manage these different elements. For example, should a bullish/bearish signal be taken into account before a major announcement? Should I take into account my bullish/bearish signal if I think the opposite? etc. Experience enables you to sort these elements more quickly and to know which ones to take into account.
Experience also enables you to consolidate your trading knowledge. For example, we learn that we should not take into account all the bullish/bearish signals that we should understand the trend of the assets (multi-temporal analysis), etc. Experience makes it possible to have concrete cases in mind, which makes it possible to reduce the amount of information to be processed. It is often said that we learn from our mistakes in life. It’s the same with trading. You memorize your most serious mistakes to avoid repeating them. If the case comes up again, your brain then uses your memory to make the decision, which saves it from having to analyse the situation a second time.
Good knowledge and trading experience enables you to manage the amount of information to analyse better, to avoid feeling overwhelmed and therefore making emotional decisions.
How can you structure your trading to avoid appealing to your emotions?
To avoid activating the emotionally related part of your brain, several methods are recommended:
-
Maximum of 4 parameters
: A study on our brains shows that, if there are more than 4 interacting parameters, we reach the limits of our intellect. In your trading strategy you must therefore limit the number of elements involved in your decision-making. There is a reason that people say you have to keep it simple in trading. A strategy’s performance is not related to its complexity. On the contrary, it is often the simplest strategies that are the most effective, especially in the long term because it is easier to stick to them. Avoid using too many technical indicators, keep only those that you think are essential. RSI and Stochastics are largely sufficient. You can add a moving average but that's all. The analysis of the price chart then enables you to obtain bullish/bearish signals.By increasing the number of tools, you increase the contradictions. If you are lost in trading, your emotions decide for you.
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Money management
: This is risk management. It enables you to control your risk and not find yourself in situations that push your brain to activate your emotion-related areas. This is what happens when you don't place a stop loss and let your losses run or when you use too much leverage. The excitement caused by the lure of profit or the refusal to accept losses takes precedence over your rationality and it is then very difficult to survive in trading.-
Stay focused on your trading
: If you trade, don't do anything else at the same time. If you are waiting for a signal that has already been identified, this is not a problem, but if you are doing some analysis, focus only on that. Don't think about anything else: watching TV, reading your emails, chatting with someone else, etc.Being interrupted in analysis requires additional effort for your brain to refocus and take into account all the parameters of opening a position again. You are not going to make this effort and make a decision without any real thought. Effectively, your brain tells you "I've already made the effort it's annoying to do it again". So you're going to do less thorough analysis.
Opening a position on a mobile phone is also not recommended. Telephone applications should only be used to cut your positions or monitor your trades. On a phone, there are a lot of external demands and it is more difficult to concentrate.
Conclusion
Trading requires a lot of thought. If this effort is too much, your emotions are activated and gradually take over. Emotions are the trader's enemy. To control them better, you need to have solid trading knowledge and experience in the financial markets. It is useless and dangerous to have a complex trading strategy, you must keep it simple without neglecting the rules of trading (money management, one-way trading). Trading requires concentration, it's not a game.
Humans are not designed for trading because of the mass of information at their disposal but they can adapt to it by imposing certain rules. The brain has a great capacity for adaptation, so use it.
