Wednesday, October 01, 2014

Cultivating Self-Control by Enhancing Working Memory

Recent research suggests that working memory--the amount of information that we can hold in our minds at one time--is more limited than previously thought, perhaps only four items.  Working memory is a chief component of intelligence and is critically important to problem-solving and learning.  Evidence suggests that we can train ourselves for improvements in working memory--an approach that has been effective in helping children with attention deficits.  Fascinating research in Japan has found that children can improve their working memories and that such improvement correlates positively with higher IQ scores.  This enhancement of working memory through training appears to be the basis for improvements students have been observed to make in their fluid intelligence.

Traders are known to complain that they formulate sound and detailed trading plans and then fail to follow through on those plans once markets are moving.  Typically, this problem is attributed to emotional interference and/or a lack of discipline.  It is quite possible, however, that the problem of following trading plans is simply a function of a trader's limitations of working memory.  It may be asking too much to keep in mind detailed plans, plus keep in mind what is happening in the market now--not to mention what could be happening in the news, in correlated markets, and in other stocks/instruments.  Similarly, failures of working memory could lead traders to forget their rules when they are completely focused on markets, leading to overtrading and/or poor trade execution.

If this is the case, then enhancement of working memory should be very valuable to traders who have had difficulty following through on their best intentions.  Cognitive training through brain strengthening games could be one way of enhancing working memory.  Another way could be through the creation of effective memory aids, such as writing down key plans and keeping them in front of us for easy reference.  Still another way of enhancing working memory is by working within a team.  While plans or rules may slip by a single person trading in isolation, they are less likely to go unheeded with extra sets of eyes on the trading.

The broader point of this post and the one previous is that traditional trading psychology might overplay the role of emotion in trading difficulties and underestimate cognitive skills and limitations.  It may well be that strengthening ourselves cognitively could be the best thing we could do for mastering the emotions of trading.

Further Reading:  Important Psychological Skills for Traders