The market is not your enemy. You are. Well not you, but some of your innate biochemistry is. Not to make this article a major lesson on biology but I want to point out one of the major buggers that messes with your head: Dopamine. It’s a neurotransmitter chemical that drives so much of our motivations and behavior. Call it nature’s motivator drug. Vegas casinos know all about it. In fact, the gambling industry’s entire business model is designed around how to maximize how much fun dopamine is having in people’s brains to extract value from the gullible millions. Scientists have studied the effects of dopamine in detail and came up with some surprising results:
We all know when something nice happens to us we experience feelings of bliss and joy. Gamblers get excited when the lights go off at a slot machine and coins fall into the slot below. Traders experience giddiness when they have a nice winning trade. So far so good, but here comes the wicked revelation: Studies show that the ‘near-miss’ effect triggers dopamine levels not only as equal but they even grow stronger over time versus a winning experience.
In short: If you win every single time the thrill diminishes, but keep the prospect of the win just close enough at hand and they keep coming back for more as dopamine levels spike through the roof as the prospect of a win is within reach. This is nature’s motivator drug to keep you hunting for that deer in the forest even if you have to try over and over. That’s why brains addicted to gambling simply can’t quit while they are ahead. Recognize: Dopamine can work as a drug that negatively impacts your decision making. But without it of course you wouldn’t have a conceivable reason to get up in the morning.
Many people of course have first hand experience with the impact their body chemistry can have on their decision making in other settings in their lives, say dating for example. “Oh my God I can’t believe I or he or she hooked up with him or her” is a common phrase that is uttered often the day after. While alcohol is often the culprit we all know there are other influences at work that can impact behavior and decisions.
So bottom line, on a subconscious level, a big winning trade can mess with your head. Your brain is seeking to repeat the thrill of the hunt for the next big trade and, in process, the hunt can become more important than the win itself. And this is, in short, the road to trading doom. 500% winning option trades sound nice and they are when they happen, but if you then try to trade for your next big one you will eventually get hammered in the pursuit of the next great white whale. So be very weary when people try to entice you down that path.
Let’s walk through some of the most critical psychological components that can impact our trading:
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