25 September 2024
Many traders like to feel that they are in control of their destiny and how they react to market changes. However, various studies have looked at how stock market trading affects the brain and the many triggers that occur. Whether this article will allow you to adapt your future trading patterns is debatable, but it will certainly open your eyes.
Many people will be aware of dopamine, which is triggered by what are broadly described as positive outcomes. This is part of our brain's preference for immediate gratification ahead of long-term gains and can, in some circumstances, lead to a gambling-like addiction to trading. While there are many differences between stock-market trading and gambling, there are also a number of similarities.
The amygdala element of your brain is a small almond-shaped structure that exists in two parts. Often described as the brain’s fear centre, it is responsible for the well-known fight or flight response which emerges during stressful times. It can prompt emotional responses that are sometimes "uncontrollable" and significantly impact "rational thinking", often leading to poor risk management. If you think about how you feel as a trader during difficult markets, crashes and extremely volatile periods, you’ll appreciate the power of this emotion.
Biases significantly impact our trading patterns, and cognitive biases can result in overconfidence and excessive risk-taking. The so-called “Dunning-Kruger" effect demonstrates how traders misjudge their level of skill due to encouraging early wins in their trading careers. As far as the brain goes, the role of the prefrontal cortex is an integral part of critical thinking and self-regulation, although constant strain from high-pressure trading can compromise this safety mechanism.
In everyday life, neuropathways dictate our daily activities, where repetitive actions create an automatic response. This is also prevalent in stock market trading, where checking markets and constant trading can become a dangerous automatic response. This can also incorporate harmful behaviours such as revenge trading or chasing losses, which can be highly damaging to your wealth and well-being. While our brains constantly assess and update the decision-making process, it can take time to change deep-seated damaging neuropathways.
Have you ever wondered why a potential loss captures your mind’s eye more than a potential gain? This is all part of what is called the neuroscience of loss aversion, the fact that the brain reacts more strongly to losses than gains, with the insular cortex becoming active when faced with losses. Research has also shown that the “pain” of losing money activates the same part of the brain associated with physical pain. This is a fascinating insight in itself, placing mental anguish on the same level as physical pain.
Those who have experienced life as a stock-market trader will be well aware of the "high" created by the brain's reward system. This has been compared to the feeling created by addictive substances and can make it much harder for traders to disengage. This way of thinking can also significantly negatively impact your trading, pushing individuals to recoup losses, exacerbating risky behaviour and, in many cases, leading to irrational behaviour. Again, research shows that when the prefrontal cortex function is under pressure, it can prompt impulsive decisions even where rational thought might suggest otherwise.
We have touched on the potential issues that regular stock-market trading can provoke regarding your mental health and long-term well-being. Long-term exposure to this type of high-pressure environment is not good for your general health. Thankfully, there are many ways in which you can reduce the effect, such as incorporating regular breaks to avoid decision fatigue and integrating physical activity to reduce stress and improve mental clarity.
Many traders find cognitive behavioural therapy helpful, allowing them to manage their anxiety, reduce impulsivity, and improve their broader decision-making process. The brain is a hugely powerful organ, but it is not built to withstand the constant high-stress situations prevalent in high-frequency stock market trading.
Back to News
+44 (0)20 7048 9400
Email Us
Client login
