Tuesday, February 09, 2010

Trading and the Brain: Trauma and the Amygdala

An interesting research report suggests that a particular brain region, the amygdala, is highly involved in loss aversion: the fear of losing money. It's interesting that the amygdala has also been implicated in post-traumatic stress reactions. As a fear center for the brain, the amygdala helps us recognize and recall danger. That is adaptive when our lives are at stake, but it can inhibit normal decision making when memories and reactions from past anxiety-producing events intrude into daily life.

An important insight that I came to when first working with traders was that many of their emotional reactions were similar to those who suffer from mild to moderate degrees of traumatic stress. This includes people who have been the victims of physical abuse, violent crime, or life-threatening accidents. It appears that threats to one's money and livelihood may be as emotionally impactful as threats to significant relationships or even threats to physical security.

If that is true, then many of the self-help techniques that we read in the trading psychology literature may be not very helpful for traders dealing with exaggerated responses mediated by the amygdala. Writing in a journal, talking with a coach, or visualizing positive outcomes would not be sufficient for reprogramming traumatic responses and overcoming emotional reactivity and loss aversion.

How could traders identify and address such problems? I will be dealing with this issue in upcoming posts.



SHW said...

I fear this may be me. I lost my father to ALS when I was 17, my mother to lung cancer when I was 29 and my wife to breast cancer when I was 36. I am an only child and have no children.

I have attempted to trade for years before and since my wife's death(I'm 41) and even with one NQ contract on, I tighten up like it's a HUGE deal that I might lose $40-80. I have hundreds of thousands in reserves, but I can't risk the value of a bottle of wine?

No amount of positive thinking/visualization/journal writing/self help (even you and Douglas's books)/partnerships or any other form of logistical thinking has seemed to help. I know it's not rational, but nothing has really broken through.

A traditional therapist said after 6 sessions of her head nodding that I simply needed to find some friends (!).

I very much look forward to your subsequent posts.

CBS said...

Thanks Brett for always helping to keep things in perspective.

Randy Reis said...

Wow, that hits home, in 2001, after being diagnosed with PTSD ( I lived across the street from the WTC and was caught in the dustcloud with my 3 year old daughter in my arms)I continued to try and trade. I had been a profitable floor trader for 20 years. I hate to admit this but AI have not had a profitable year since despite very strong efforts to get my psyche straightened out.

Radek Dobias, H.B.Sc., M.W.S., B.Ed. said...

From my blog, Feb 3:

"Trading this morning, I realized that the most important thing for a trader is to trade amygdala-free. In other words, to transcend one's innate biological programming in terms of reactions and fears. Biological trading is a losing proposition."


Jay said...

I am also going thru this. I have 2 problems that work together. I trick myself into thinking that I am saving myself from risk when I "pass" on the first trade setup that is almost perfect. Like today at the double bottom early am with internals supporting a long just before the wider double top in NQ. Then I pass on that good trade entry, only to see it follow thru. Then I try to say that it is ok, but I guess I feel stress, because I then manufacture a setup that doesn't exist, or is a tiny subset of my trading plan and I even try to use improved management skills on it but of course, it is a mistaken and a failure, but at that point, I can't think because of the anxiety attack I am having, I even widened my stop to the bottom of the current bar on the NQ 2m chart at minor resistance that I took today after price was pulling back after the double top and after NYSE TICK hit a 1k extreme that it was still pulling back from. Price dropped all the way down on that chart to the 200ma. Then the Greek news hit.... I am journaling this pattern right now to try to analyze it. I can't afford to do this ever again. I hate this struggle. I am a good trader when I am functional.

Jonathan said...

I've used emotional freedom technique (EFT) and hypnosis to decrease the stress and emotion in my trading and found them both very helpful.

Michele said...

This is so strange - like seeing yourself in a mirror you didn't expect. What SHW wrote here just struck home.

In the last ten years both my parents died, my spouse died, my dog died, and I went through a divorce. I too am an only child and have no children. Half my family lives in a foreign country and I'm not on speaking terms with the other half over legal issues.

And here's the kicker: I too have many hundreds of thousands of dollars in reserves, and I am so risk averse these days I've stopped trading futures entirely. The thought of losing as little as one NQ point is simply not acceptable to me. I'm sure this isn't doing my trading any good, I understand that it doesn't make sense, but I still do it anyway.

How very very strange...

Claire said...

I knew if I waited long enough , they'd find an excuse I could use with pride.

As a self employed trader, I don't qualify for Unemployment when things are bad, so maybe this would put me in the running for Disability!

Yes, paralyzed trigger finger, a terrible malady.

Only half kidding.