Do you have a tendency to chase price? That means, buy high in the hope of selling even higher. Or selling short during a rapid decline without waiting for a pullback.
Be honest. If you are male, you probably engage in this behavior, due to the primitive hunter within you. You see, there’s a part of your brain that is still on the Savannah. There, chasing was our basic mode of survival, because animals flee; and spears and arrows are short range weapons.
Chasing made sense 100,000 years ago, but in terms of trading psychology, we often do it at exactly the wrong time.
We think: “The market is running away and I don’t want to miss out. I know it’s against my rules to chase, but my gut is telling me that this is just too good of an opportunity to miss. Therefore, I’m going for it!”
Heat of the Moment
In the heat of the moment, this argument seems to make sense, but like other types of passionate urges, it distorts our thinking. The more heat we feel, the dumber we behave and we eventually recognize this in hindsight.
The palpable sense of urgency we feel when the market starts moving quickly comes from dopamine circuits deep in the brain. Dopamine is the brain chemical designed to motivate us to chase and not give up until we score dinner. It is a very quick trigger; dopamine can signal the body to get going in less than 100 milliseconds.
Dopamine stimulates the entire nervous system and might make us feel smarter, but the IQ boost is illusory. Under the influence of dopamine, the nerve supply to the forebrain is actually turned down. The dopamine surge distorts our trading psychology. The brain wants us to act first and think later.
When you finally wake up from this trance, you will be surprised and often dismayed at what happened.
Bottomline: When you feel the urge to chase the market to avoid missing out, your “Inner Neanderthal” has taken over your trading like a body-snatcher. One alternative is to walk away from your screen for a few hours. I myself will go workout or play tennis, as I’ve found being active gives me a less reactive attitude while trading. So make sure to find other ways to keep yourself occupied.
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.