Scared Money, is a natural human condition made much worse by Aversive Conditioning & Random Rewards. You have probably heard professional traders warn about trading with “scared money.”
According to Mark Douglas, writing in The Disciplined Trader: “In the market, the fear of losing one’s fortune is every bit as intense as the fear of losing one’s life from an attack by a wild animal. I don’t think I could put the difference between consistent winners and everyone else more simply than this: The best traders aren’t afraid.”
So why is trading so scary? Neurofinance has the answer.
Neurofinance studies the relationship between the brain and money. We now know that trading activates the same primitive centers in the brain that are responsible for self-preservation. These are the primal emotional and defensive layers of the brain that do not respond to will power (self talk). In fact, the brain is hardwired to prevent you from turning off its primal circuits, its core defensive and reactive processes.
Why? These processes, such as fight, flight and pursuit have great survival value. When these ancient parts of the brain are in control of your trading, however, you will automatically do the opposite of what you consciously intend. It may feel like self-sabotage, but it is not diabolical… it is biological. It is just your self-preservation instincts taking control. It is difficult to manage an instinct, which is one reason why so many traders underperform and eventually fail.
Genetics does play a role. There is a gene for “jumpiness,” which makes some people much more senstive to loss or missing out or being wrong than others. There is also a gene for having a cool head. And, there is a gene that helps us be moderately reactive.
Normal human instinctual fear, which may be worsened by your genetic makeup, will interfere with trading success because it will make you more reactive to the randomness in the market. Winning traders are either not afraid or carefully manage their fear.
To eliminate self-sabotage, you have to reduce your fear to manageable levels. You can’t trade well with a scared brain.
Once trading becomes associated with painful experiences, traders come to expect losses and betrayal by the market. Because risk cannot be eliminated from trading, the inability to tolerate risk works against you. It makes you late in pulling the trigger (waiting for confirmation) or makes it impossible to stay in a good trade and let winners run.
To trade successfully, you need to reduce fear to a level where it is healthy, i.e. you respect the reality of risk, but your judgment and behavior are not impaired by fear.
Until Next time,
Dr. Kenneth Reid holds a Ph.D. in Clinical Psychology. He is currently a trading coach and has published articles for Forbes, SmartMoney, and SFO Magazine. He has also appeared on CNBC and writes a column on The Trading Psychology for Trader Planet. Kenneth Specialized in trading stock and futures and is working on a futures trading book.