January 17, 2021


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Guest post by Traderlion.com

 

Your brain commands your entire trading process. Whether you are a novice or an expert, you’ll want to learn how to most effectively use it. It is the awareness and applications of the brain that differentiates the novice trader from the expert.

To understand how experienced traders can limit their losses and quickly determine if an opportunity is a good or a bad one, we must assess the significant processes the brain undergoes each time we apply logical reasoning or intuition.

Generally, there are two aspects of the brain – the left and right sides have different functions and the balance between them is naturally different in each of us.

Your left brain is responsible for the analytical, logical, and practical decisions we make daily. The right side on the other hand is responsible for our creativity, intuition, and emotions.

The two sides of the brain communicate consistently and without even being aware of it, there is a constant battle because sometimes they just won’t agree with each other.

When you are predominately left-brained, you might function with a lot of logic and discipline. Conversely, if you are predominately right-brained you might lean towards using intuition for trading.

Right away you can see the benefits of the left brain and might see why it would be an advantage for a trader to lean to the left. However, this is false.

When you are predominately left-brained, you might become too rigid in your approach. Remember, trading is an art, not a science. Often you will find yourself overthinking, where in the market we are required to make swift decisions.

Looking at traders that are more right-brained, you might rely too much on intuition, or find yourself making emotional decisions which can be disastrous to your account even if you have a good idea where the market is heading.

Both areas have their unique benefits and drawbacks. At this point you must be thinking ‘I need to use them both equally’ but the truth is naturally we all lean towards one side and that is good because trying to stay in the middle will result in a lot of confusing signals.

In other words, our gut might be saying one thing while our methodical approach is saying another.

These confusing signals without realizing make it challenging to overcome biases leading to a lot of judgmental errors.

Where is your natural disposition? Where does your right brain/left brain lie? In those questions, you will find a new awareness that will become a powerful tool in your journey to becoming a successful trader. Once you understand your unique strengths you can capitalize on your greatest asset.

To better understand this let’s look at the brain of a novice & experienced trader.

For the novice trader, the intuitive part of the brain is most active. In many cases, they do not think about the consequences but base their decisions on recent data or “gut instinct.” The signals will travel from their eyes to the left side of the brain where it will be recognized as a pattern. Due to the lack of experience and meaning of these patterns, the signal will head to the right brain in search for answers.

Because of the lack of previous patterns and experience to compare this with the brain will go back and forth leading to a lot of questioning, second-guessing and more internal battles. This creates a state of dissonance. Whichever action the novice decides to take next will be done to alleviate this sense of anxiety. Therefore, the outcome of the trade will likely lead to future mistakes because the decision was based on a state of confusion.

For the experienced trader, the reflective part of the brain is most active. At this point, the trader has developed to recognize a lot of different patterns. With these patterns stored, the experienced trader can execute based off much more reliable deductions.

When he sees patterns, the brain processes them quickly because they are familiar, therefore, there is no dissonance that occurs when receiving the same signal. The signal will bring out a much better feeling because of this recognition and fear or anxiety will be much less of a factor in the decision process. In other words, the experienced trader is trading in a state of clarity.

Looking at the differences of the brain between the novice and experienced trader you understand that the brain can be trained for better decision making and ultimately to reach excellence in trading.

Unfortunately, these changes in the brain are mainly a result of commitment while going through market cycles for many years, however, with a keen awareness of how the brain processes signals and the harmony required during the decision-making process you can effectively make future decisions much more like the experienced trader.

The goal is to process patterns accurately, instantly, and in a state of complete clarity.

If you bring awareness to every aspect of your trading you will speed up the learning curve and minimize your mistakes. Keep your focus small and try to build situational and pattern recognition slowly rather than attempting to master every aspect of trading at one time.

Be aware and journal your thought process and feelings as you navigate the markets. You want to become a mindful trader and be in tune with your thought processes.

Instead of tracking your trades in a spreadsheet and only recording the percentage gained or percentage lost, write down why you took the trade, how you felt, and why the trade was closed. This detail will be much more valuable and will immensely speed up the learning curve.

The more awareness you bring to your thought processes, the faster you will develop a brain more like that of an experienced trader.

Overtime your intuitions will become more reliable because they are forming based on recognition of similar situations or signals in the past rather than recent feelings that you don’t understand due to lack of awareness.

Soon you will be able to make swift decisions when the market requires them with confidence instead of accompanied by a cloud of fear and anxiety. The result is much more accurate decision making which leads to smaller losses and much more profits.

 

About The Author

TraderLion

Former William O'Neil + Co Portfolio Manager & team focused on high growth stocks help break down the art of trading since 2012.

www.traderlion.com

 

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Memorable Lines From This Post

Your brain commands your entire trading process. Whether you are a novice or an expert, you’ll want to learn how to most effectively use it.

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Once you understand your unique strengths you can capitalize on your greatest asset.

Click to Tweet

The experienced trader is trading in a state of clarity.

Click to Tweet

The brain can be trained for better decision making and ultimately to reach excellence in trading.

Click to Tweet

Keep your focus small and try to build situational and pattern recognition slowly rather than attempting to master every aspect of trading at one time.

Click to Tweet

The more awareness you bring to your thought processes, the faster you will develop a brain more like that of an experienced trader.

Click to Tweet

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