Watch out for your lizard brain: Shutterstock
Share traders should rid themselves of irrational, ‘lizard brain’ behaviours by avoiding distractions, rewarding good behaviour and punishing ill discipline, according to Australian investor and author Alan Hull.
Hull has been a professional trader for about 30 years and will host a ‘Trading Psychology’ workshop at the Sydney Trading and Investing Expo on Friday.
Speaking to Business Insider in advance of his presentation, Hull blamed the ‘lizard brain’ – the amygdala – for irrational decisions like failing to execute stop losses or wanting to make intraday trades.
The amygdala is part of the limbic system and is responsible for emotional learning and instincts like the fight or flight response.
“The new, rational part of the brain might say ‘I need to lose weight’. But the old brain, the lizard brain, is the part that says, ‘One bit of chocolate won’t hurt’,” Hull explains.
“The old brain is instinctive. It hates losing money because money represents our ability to survive in the modern world, so it will avoid crystalising a loss at any cost.”
Hull says novice traders’ natural fear of losing prevents them from executing stop losses, which are limits that they previously, rationally decided to put on their positions.
Instead, the traders may watch as stock prices continue to fall, racking up larger and larger losses as they wait for their fortunes to turn.
Because the lizard brain seeks instant gratification, Hull warns that it is also responsible for the popularity of day trading, despite the fact that for most traders, intraday trading is a losing game.
“So many traders today are seeking short-term success,” he said. “During a bull market, everyone’s a winner and intraday trading works out: all ships float on a rising tide.
“But when you get into a tough market, day trading is very, very hard. Very few people make money from intraday trades.”
Here are Hull’s four tips for overcoming your lizard brain:
1. Don’t look at your equity
Trading decisions should be rational, but the amygdala can trigger irrational, emotional responses to losses and potential gains.
“Anyone can take a profit, but it takes a very disciplined trader to take a loss,” Hull says.
“Some traders tell themselves, ‘It’s not a loss unless I sell’, and they will switch tactics mid-trade to avoid having to accept a loss.”
2. Avoid noise
Headlines may signal a bull market one day and a bear market the next. Hull says traders should ignore noise and stick to the plan: “You need to figure out what it is you’re going to do and do it.”
3. Implement the buddy system
An objective observer might be able to tell you if you’re acting irrationally, or if your strategy genuinely needs to change.
4. Train your lizard brain
Hull recommends rewarding your lizard brain for making rational decisions – whether or not they result in monetary profit. Rewards can be anything from a piece of chocolate to an afternoon off work.
“I know of some traders who give themselves a piece of chocolate not for making money, but for following trading rules,” he says.
Hull also punishes his lizard brain by giving a certain amount of money away to a charity or telling someone when he fails act rationally.
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