Venti has been a trader for some time now. He has read books, studied indicators and spends a lot of time on the internet searching for new information about trading. His favorite pastime is to search for trading indicators on YouTube. He is smart and a quick learner. If you ask him, he can tell you how the moving average crossovers work with the MACD. In fact, he gets very excited talking about his new system and how profitable it will be.
Venti likes to trade the Forex markets. He trades almost every day. He does not lose a lot of money but a little bit here and there. He has occasional winners when he trades his system well. The problem is that when he goes through a series of losses, he can’t hold on to his accumulated profits. His account has huge swings. When you look at his equity curve, it has big up and down swings and there is nothing consistent about it. He thinks that he breaks even which psychologically keeps him going but the reality is that his account is in a net loss. His logic is I am paying a price to learn how to trade. His problem – he doesn’t know if he will ever make consistent money in the markets.
After years of research, he developed a trading plan and started trading it. The strategy was losing a little bit but he knew that a big winner is coming soon. Finally, the day arrived and a pattern jumped out of the chart. This was a good buying opportunity as the market had formed a double bottom. The MACD was perfect and so was the moving average crossover. He took the buy position in EURUSD. The market started to move in his favor and the trade started to make money. He got excited. His heart started to race and his hands got clammy. The reward was near. This was going to be a big winner. I should take another buy position and let it run. He thought to himself. After all, this was his opportunity. He took another buy position and the market moved up 1 percent. This covered his last loss and overall he was in profit. In a state of euphoria he calls his best friend and tells him about his new trade. He is planning to buy a new car. As Venti is watching the move growing in his favor, the market takes a pullback, its ok. It’s just a short move. He says to himself. The pullback becomes bigger and his second trade is now losing money. Overall, he is still up. What should I do? I should move the stop to break even. He moves the stop to a break even point. The pullback touches his new stop and his positions are closed with no money won or lost. The excitement is gone. To make it worse, the uptrend resumes. Venti is frozen. He can’t do anything except to see the trend running in the predicted direction of his system. Another opportunity is lost.
Two weeks later, Venti is back to his charts and patterns trying to figure out what went wrong. He realizes that he has been unable to run the profits. He is using stops to cut the losses but this is not enough to make money in the markets. He has to run the profits.
Venti and his Ventral Tegmental Area
When you experience pleasure, your brain releases Dopamine. Dopamine is primarily produced in the Ventral Tegmental Area (VTA) in the midbrain. The Dopamine is sent to Amygdyla which controls emotions, Nucleus Accumbens (NA) which controls the motor functions, to the Prefrontal Cortex which helps in planning and to the Hippocampus in the temporal lobe which is responsible in forming the memories. Do you get the picture?
Venti is in a cycle. When he sees a familiar signal on the chart, his learned brain tells him this looks good, let’s do it again. Dopamine is released in the VTA. The result is euphoria (desired effect). The Prefrontal Cortex focuses on the pattern developing on the chart. The Hippocampus remembers this and the nucleus accumbence is stimulated. Drugs like cocaine and amphetamine do the same. At the same time, serotonin levels in the brain go down. Serotonin is responsible for sensations of satiation. When you keep activating this reward circuit, you are creating more and more memories and neural pathways in your brain which have not produced desired results in the past. Trading at this stage is not only will power, it is also a physiological response. Negative consequences or losses in trading do not affect an addicted brain in the same way as the normal brain.
Why running the profits is so difficult?
Have you ever been in a situation where you have a winner and you feel euphoric? or your mood is dependent on your win and loss in the markets? The evidence is from researches done in animals. Scientists gave cocaine, a stimulant drug to the rats when they pushed levers. Rats learned very quickly that pushing the levers will get them the drug. They were also allowed to increase their dosage to activate reward circuits.
When you give the rat regular food, paired with a substance that makes it sick, it learns to avoid that food but when you give an addicted rat its favorite drug, paired with a substance that makes it sick, it still wants that drug! Why? because the only thing that matters is an instant reward and gratification. A rational mind has been taken over.
In trading, once you reach this stage, it’s not about euphoria anymore. You have the need to trade just to feel normal. You are a Greed Oriented Trader.
Trading Addiction – You are in a Casino in the comfort of your own home
Trading is highly addictive because of your brain’s physiology. Trading has led people to depression, anxiety, and even suicide. There are cases where couples have divorced, individuals have lost jobs, their houses and savings. I have personally known people who have risked it all and have suffered tremendously.
At Tradingon.com our job is to help you become an informed trader and provide you with tools that will take you to the level of becoming a Risk Oriented Trader.
Becoming a risk-oriented trader is what separates winners from losers. This is a highly competitive business where 90% consistently lose money. The good news is that it’s possible to be successful in the markets. You have to move from a fear and greed oriented trader to a risk orientation trader.
Keep reading.
