Emotional Trading

Emotional-trading | psychology trading Having met a few traders within the last week, there is a common element that they all share.  I noticed that each one of these traders couldn’t get their emotions out of the trade. I know it is an extremely hard thing to do, but it can be done!

The ability to separate one’s mind from an event that is bringing them either immense joy or excruciating pain is something that a majority of people cannot do. People are simply wired to act a certain way.

In the field of epigenetics- a field that investigates heritable alterations in gene expression caused by mechanisms other than changes in DNA sequence, they have found that people from previous generations can pass down psychological trauma to future generations. I know, hold on; I will make the link with trading in a minute or two.

A study was done by Rachel Yehuda, Stephanie Mulherin Engel, Sarah R. Brand, Jonathan Seckl, Sue M. Marcus and Gertrud S. Berkowitz studied the effects of mothers that suffered post-traumatic stress disorder in New York during September 11, 2001. The study found that the mothers had a traumatic experience which caused their bodies to lower their cortisol levels.  Cortisol is the gene that is responsible for dealing with stress.  A lower cortisol level means that people have a harder time dealing with things that upset them.  The results of the study found that the mothers passed on the lower levels of cortisol to their children.  Those children didn’t suffer through any traumatic experiences, but their cortisol levels were lower.

I could cite another study done by Coates and Herbet which showed that extended periods of elevated cortisol levels produced selective attention to negative events.  This raised the level of anxiety, which reduces a trader’s preference for risk and execution.

So, if the majority of people on the planet are genetically wired a certain way, how does one get the emotions out of trading?  Automation!

It’s time for people to start automating their trading strategies.  I will go into detail about the pro and cons of  systematic trading in my next post.

Here is a link to the post about systematic trading.

  http://trendmovements.com/2012/09/02/automated-trading-strategies

Chad Grant

 


Rachel Yehuda, S. M. (2005, May 3). Transgenerational Effects of Posttraumatic Stress Disorder in Babies of Mothers Exposed to the World Trade Center Attacks during Pregnancy. The Journal of Clinical Endocrinology & Metabolism, vol. 90 no. 7 4115-4118.

J. M. Coates, J. H. (2008). Endogenous steroids and financial risk taking on a London trading floor. Proceedings of the National Academy of Sciences, vol. 105 no. 16 6167-6172.

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