Wednesday, May 02, 2007

Trading and the Adrenaline Rush

In today's Trading Psychology Weblog, I linked to a blog post on the topic of the "flight or fight" adrenaline response and its effect on trading. Dr. Bruce Hong, a blog reader and active trader, kindly responded to the link and offered his own, medical perspective:

I don't wish to sound critical, but your analysis is a little bit incorrect. Allow me to introduce myself. I am a physician (ER) with a great deal of experience with adrenaline and adrenaline-producing situations.

First, let's look at the biological role of adrenaline: Let's say you're walking down a path and a tiger jumps out at you. Instantly, you perceive a threat and adrenaline is released. This is a response that is AUTOMATIC and not under conscious control. The immediate response is, as you note, to prepare your body for "fight or flight". But, beyond increasing your heart rate, blood pressure, and blood flow to your muscles, IT ALSO DOES SOMETHING IN YOUR BRAIN! Namely, it shifts blood flow AWAY from the frontal lobes and to the motor cortex. After all, you don't need to do any long-term planning at this point. Either you survive - or you don't.

This response is very beneficial in acute, MILD stress. In biological terms, 'mild' means you are not having your limbs torn off or exsanguinating. Acute means lasting <5 minutes. These are biological definitions and, unless re-stimulated, that is roughly how long the "adrenaline rush" lasts.

The important thing is that we are no longer at risk for tiger attacks, but our automatic response to threat is still the same as if a tiger had just jumped out at us. And if we are in a trade, this same sequence of events still occurs. Remember, it's automatic. Now, every one is aware of the obvious physiologic responses that WE CAN FEEL. You report that this is uncomfortable - it's not. It’s just biology. It's only uncomfortable because you are sitting, trying to remain calm, AND TRYING TO MAKE GOOD DECISIONS. If you were a pro athlete, you would want this to occur during a critical point in the game, and to make quick, ‘instinctive’ moves – hence the term 'adrenaline rush'.

BUT WHAT YOU CAN'T FEEL IS THE REDISTRIBUTION OF BLOOD FLOW IN YOUR BRAIN.

And this is what destroys us as traders. Remember, blood is flowing TO the motor cortex and AWAY from the Frontal lobes (the governor or long-term assessment and planning part of the brain.) Normally, it functions as a damping mechanism to reduce or counteract the effects of emotion on our decision-making processes. It is the part of the brain that allows us to assess the long-term consequences of our actions. But because of the presence of adrenaline, we have an overwhelming URGE TO DO SOMETHING - NOW! And all our thought processes are directed to threat and elimination/avoidance of that threat. So instead of thinking things through carefully, we make abrupt, impulsive decisions.

Now, here's the take home message. There are a number of things that you can do behaviorally, but not cognitively. (Remember, the thinking brain is shut off for ~5 minutes). So, you can force yourself to wait 5 minutes, do jumping jacks to 'burn off the adrenalin', and, most importantly, use visualization BEFORE you enter the trade. You would visualize yourself entering the trade and rehearse every situation and prepare your responses to each possible event. In that way, you don't perceive a threat, but a contingent event - so you don't develop a threat response. And, if something totally unexpected happens, you would have prepared a plan, like "exit immediately" or do a quick scan of the news wires, or exit and then do a scan, etc.


BIO: Dr. Hong was trained in Internal Medicine and started his career in Geriatrics and Chronic Pain/Addiction treatment, where he learned quite a bit about the role of adrenaline in behavior. He recommends the work of Dr. Robert Sapolsky, who has worked in the area of stress, as particularly useful. Now in his 60's, Dr. Hong is transitioning toward retirement and life as a trader. He credits Woodie's CCI Club with helping him think for himself as a trader. Dr. Hong can be reached for questions at bhong 4664 at yahoo dot com (no spaces).


RELATED POSTS:


Techniques for handling performance anxiety in trading

The Most Important Psychological Skill for Traders - Part One, Part Two

5 comments:

The Dude said...

Hi Brett,

Great article, I forwarded it to a few of my non-stock trading friends too. Really explains, in all situations, we need to calm down to make good decisions.

Thanks,
Matt

Brett Steenbarger, Ph.D. said...

Hi Matt,

I think one of the important implications concerns position sizing and risk management. By exercising good risk control, we minimize disruptive adrenaline rushes. Thanks for the comment!

Brett

DrFox said...

Hi Dr. Brett,

Very nice text from Dr. Hong. I like this ideia of our brain loosing the rational control in exchange for some instintive survival bias.

Again, it will be a matter of planing and training to avoid yourself getting into this biological trap.

Cool!

[]'s

DrFox

ps: I am still looking for that text to submit to you about Brazilian stock market.

Brett Steenbarger, Ph.D. said...

Hi Dr. Fox,

Thanks for the comment. I look forward to any material you might have on the Brazilian market--

Brett

F F said...

Hi Brett,

Found the post via googling "adrenaline trading" ... great article!

That said, can you control adrenaline by just changing your thinking during trading?

Thanks,
F F