How Your Brain Gets In The Way of Your Trading Success

By | December 2, 2015 3:57 pm

During our training sessions with students we are very specific t0 make them understand you have lost money not because of market but the main reason is Your brain doesn’t like to lose.Its all there in your subconscious mind which is responsible for profit and loss for a trader.

Brain remembers everything.

How you trade in the future is often affected by the outcomes of your previous trades.  For example, you may have sold a stock at a 20% gain, only to watch the stock continue to rise after your sale.  And you think to yourself, “If only I had waited.”  Or perhaps one of your investments fall in value, and you dwell on the time when you could’ve sold it while in the money.  These all lead to unpleasant feelings of regret.

Brain is great at coming up with excuses.

Sometimes your investments might go sour. Of course, it’s not your fault, right? Defense mechanisms in the form of excuses are related to overconfidence. Here are some common excuses:

  • ‘if-only’: If only that one thing hadn’t happened, then I would’ve been right. Unfortunately, you can’t prove the counter-factual.
  • ‘almost right’: But sometimes, being close isn’t good enough.
  • ‘it hasn’t happened yet’: Unfortunately, “markets can remain irrational longer than you and I can remain solvent.”
  • Operators are making my trade go wrong
  • FII’s are manipulating the market.
  • The rally is going to fade than I will make a killing

Brain loves loss aversion

Loss aversion, or the reluctance to accept a loss, can be deadly.  For example, one of your trading bet may be down 10%.  The best decision may be to just book the loss and move on.  However, you can’t help but think that the stock might comeback.

This latter thinking is dangerous because it often results in you increasing your position in the money losing investment.  This behavior is similar to the gambler who makes a series of larger bets in hopes of breaking even.

5 thoughts on “How Your Brain Gets In The Way of Your Trading Success

  1. Vinit

    Excellent write – up by Bramesh sir. Mr. Harsh shared his experience which is in a way everybody’s story ! What is important is to realise and note those two mistakes committed and more importantly ensure that they are not repeated again. Though… Easier said than done, such blogs getting hammered into our brains time and again will go a long way in fine tuning our rather stubborn brains !!

  2. Harsh Mehta

    Let me share my example from todays trade… I trade only intraday and after lots of time and effort have decided to trade for fixed 2% gain on my capital for the day and when my profit is booked, I must stay out for rest of the day, thereby trying to avoid any compulsive/impulsive trades…

    First hour and I had more than my targert.. made 4% gain on capital and moved away from screen. Later in the day as market kept falling, my brain keeps telling me that it has fallen good enough for the day, take a counter trade.. i take one, and my SL is hit… wipes half of my profit.. At that time I shud have stayed away.. but brain does not like seeing my profit halved (still i was positive @2% gain as per my daily target)… so still take a counter trend trade wishing that day bottom is made.. (it was a wishful trade only without any buy signal).. i made profit on it due to decent bounce back in later half…

    But I committed 2 mistakes… 2nd trade wasn’t necessary as I had more than my target in first trade.. and 3rd trade was just to get even with market for my loss making 2nd trade..

    So brain or emotions, whatever we call, it spoils what was earned with purely technical trade (without emotion)…

    1. Bramesh Post author

      Thanks for sharing your personal experience. Will benefit blog readers.

      Appreciated !!


  3. harshvardhan

    After a series of dissapointments i realised that trading is more of a mind game and money management and you have nailed the same with this post!

    Thanks for all that you post.


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