The ‘Rat Brain’ and Trading Success

Today I’m addressing Winning Psychology. If we look behind the reasons why traders fail we find one or both of these reasons:

  • The don’t know what to do and/or
  • They don’t do what they know.

Winning Psychology addresses the latter. I define Winning Psychology as a set of tools that facilitates the consistent execution of our trading plan. To understand why we need the set of tools, we need to understand our brain’s make-up. Let’s turn to that.

Paul D. MacLean, an American physician, made an exciting breakthrough for neurology with his concept of the Triune Brain. He postulated that our brain is composed of three brains:

  • The Reptilian (responsible for our survival instincts – our fight or flight response). When triggered the Reptilian’s response is action. Action, any action, is better than no action.
  • The Limbic (responsible for our emotions)
  • The Neocortex (responsible for our thinking processes).

Now if all we had to do was control our ‘fight or flight’ response, as traders we would find it easier to make money. But we need to add to the Triune Brain one more piece of essential information. Advances in Neurology have established that the best decisions are made when our emotions and reason are in sync. The idea that we should trade like emotionless robots has been shown to be impossible (at least for most of us) and even if possible, the emotionless decisions would be sub-optimal. The key to a robust decision-making process is to ensure that the Reptilian (Dr. Janice Dorn’s ‘rat brain’) does not overwhelm the Neocortex. This link between emotion and our decisions is an important finding.

When we trade, we tend to attach emotional significance to our profits and losses. Despite years of trading I still experience joy on profitable trades and sadness when I lose money. What I do is experience the pleasure and pain and move on. It’s important I do this or else I am likely to have unprocessed emotions and when that happens, I inevitably do some thing silly (like enter without pre-defining my loss) on my next trade.

The management and processing of emotions (managing the ‘rat brain’) is the key to Winning Psychology.

The best tools I know to managing the ‘rat brain are PREPARATION & REVIEW. In the preparation phase, I suggest you use some technique that will bring you to the Alpha state e.g. the Relaxation Response or some form of meditation. Once in the Alpha State, we use visualization to complete the preparation phase.

On occasions I have been asked why visualization and meditation help.

Studies have shown that visualization exercises help performance. Since trading is partially a performance activity, visualization does have a favourable impact. The meditative process is added because visualization has been shown to assist and bolster the meditative process.

The process I teach is a simple one – let’s take the entry as an example:

  • Complete your analysis and define your entry and exit strategies. You know what the market has to look like to take the trade and what it has to look like to remain and to exit. You have defined your stop loss and determined your potential core profit target. The risk/reward is one you consider worthwhile.
  • You consciously accept the loss. It’s essential here that you explore what the loss of $X would feel like if it occurred. The key is to imagine that the loss has taken place and that you feel it’s OK to take the dollar loss. By that I mean that you’ll be able to experience the sadness and then be able to move on without the loss constantly replaying. If you find that in your imagination you are unable to accept the loss, reduce your position size.

This usually works.

  • You slip into the meditative state using muscle relaxation, a meditation CD or any mediation technique (like ‘mindfulness’, ‘transcendental meditation’, Chopra’ Primordial Sound, ‘Natural Stress Relief’ etc). I would keep this aspect to around 10 minutes or so.
  • Once you feel you are relaxed (in the Alpha State), visualize every step of the entry and exit, profit and loss. Check again how you would feel if the loss occurred. See yourself experiencing the emotion resulting from the loss and moving on.

The Review Phase is similar.

  1. We review our equity and psychological journals for lessons about the markets and for insights into our personality.
  2. Then we slip into Alpha and ask: “What did I learn about the markets and/or myself”?
  3. We then visualize applying what we have learnt.
  4. Finally when we come out of meditation, we write down the applications in Step 3 anything other ideas we consciously think of.

There you have it: the Preparation and Review strategies to manage our’ rat brain’ for optimal decisions. The Preparation and Review does take time as does journal keeping, analysis etc. These processes are the price for success. On the other hand, the success we experience makes that price more than worthwhile.

4 thoughts on “The ‘Rat Brain’ and Trading Success”

  1. Thank you so much, Ray, for the opportunity to share with your readers.

    I am pleased to offer several articles on the “rat brain” to the readers of this blog.

    Also, I welcome any questions or comments on the relationship between “old brain” vs. “new brain” trading. The best traders are neurobehaviorally androgynous, i,e., they have learned how to harness the power of both sides of the brain and to harmonize the rat brain with the cognitive ( higher level, thinking) brain.

    Here are several links that I hope will be of some help to my fellow traders.

    Thank you!

    Doctor Janice
    janice@thetradingdoctor.com

    http://thetradingdoctor.com/updatesandalerts/jd_yourratbrainisouttogetyou.html

    http://www.thetradingdoctor.com/pdf/ThisIsYourBrainOnTrading.pdf

    http://www.thetradingdoctornewsletter.com/video/webinardemo/

  2. Hi Janice

    Thanks for dropping by and for the links to the articles. Thanks too for the term ‘rat brain’. I love the way it describes the reptilian response!

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