How Neurotrading and Psychotrading Improve Trading Decision-Making
If you’re new to the trading world or if you’ve been around for a while, you’ll know that trading is not just about strategies and technical analysis. It’s also important to consider our psychology and physical functions, as these can influence how we make decisions and directly affect our operations.
Let’s start by understanding the first concept, neurotrading. This is a relatively new field in finance that uses neuroscience and psychology to improve decision-making applied to your operations.
But, what is neurotrading? Why should I, as a trader, be interested in it?
Well, in simple terms, Camilo Delgado and Pedro Hernán Pérez describe neurotrading as a technique that uses neuroscience technology to measure investors’ brain activity while making trades in the financial market. The goal is to identify patterns and trends in investors’ brain activity that may indicate when to make a buy or sell decision.
To understand how neurotrading works, it’s important to know some key concepts of neuroscience. The human brain is composed of several systems that interact to produce behavior and decisions. The limbic system, for example, is associated with emotion and motivation, while the prefrontal cortex is responsible for reasoning and decision-making. In neurotrading, neuroscience technology is used to measure investors’ brain activity and detect patterns in these brain systems.
And how does
neurotrading differ from psychotrading?
Psychotrading focuses on the analysis of psychological factors that influence investment decisions, such as fear, greed, and overconfidence. Both techniques share the goal of improving investors’ decision-making, but they focus on different aspects. It is mainly based on the theory that investors do not always make rational and objective decisions. Instead, their decisions are influenced by subconscious emotions and biases. By understanding how these psychological factors influence investors’ decision-making, they can identify patterns in market behavior and make more informed decisions.
According to a study by the University of California, successful traders have more emotional control than less successful traders. This suggests that emotional management is key to success in trading (Barber & Odean, 2001). Another study by the University of Cambridge found that traders who are exposed to stressful situations are more likely to make irrational and suboptimal decisions in trading (Coates & Herbert, 2008).
It’s very easy to be carried away by emotions in trading, whether it’s the emotion of greed, fear, euphoria, or panic. These emotions can have a significant impact on your trading decisions and can affect your financial results.
To avoid letting your emotions dominate you in trading, it’s important to develop the right MINDSET. The famous psychologist Daniel Kahneman has extensively talked about irrational decision-making in trading in his book “Thinking, Fast and Slow.” Kahneman points out that traders often make decisions based on intuition or instinct, which can lead to costly mistakes in trading. Here are some tips that will help you maintain a healthy mindset in trading:
Learn to control your emotions.
According to the studies mentioned above, emotional management is key to success in trading. If you feel excited, anxious or worried, it’s best to take some time to calm down before making trading decisions.
Keep your expectations realistic.
Psychologist Brett Steenbarger has also extensively written about the psychology of trading in his book “The Psychology of Trading”, arguing that success in trading not only depends on technical and analytical skills but also on the trader’s ability to manage their emotions and thoughts. Many traders think they can get rich quickly in trading. However, it’s important to keep your expectations realistic and understand that trading is an activity that requires time, effort and patience to achieve good results and make a living from this profession.
Keep a trading journal.
Keeping a trading log is an excellent way to stay in tune with your emotions and make fact-based decisions. Write down your trading operations, your thoughts and emotions, and regularly analyze your results. This will help you identify patterns and improve your trading strategies.
If you want to start keeping track of your trading activity, sign up for Swiset and start tracking your operations.
Learn to accept your losses.
Losses are a natural part of trading, and although no one enjoys them, it’s important to learn to accept them. If you focus too much on your losses, you may lose objectivity and make unreasonable decisions.
In summary, both neurotrading and psychotrading are techniques that seek to improve investors’ decision-making. While neurotrading focuses on measuring brain activity to identify patterns in investors’ decision-making, psychotrading focuses on the psychological factors that influence investment decisions. Although they are different techniques, they can complement each other and help investors make more informed and profitable decisions. Ultimately, the combination of both techniques can significantly improve the accuracy and profitability of decision-making in the financial market.