Why Traders Naturally Cannot Follow Their Trading Plan
- The brain automatically engages “distinct mechanisms” to handle these two scenarios differently: (i) risky situation where the probabilities are known, and (ii) ambiguous situation with incomplete information where historical probabilities provide only a clue. For the latter, there will be a “uncertainty circuit” that will raise a red flag to say “more information needed”.
- This results in traders trying to do exactly what they planned while their brain fights them to find more information or to scramble in the face of a clear, but maybe only subconsciously perceived, threat.
- Just because you decided on taking a long or short trading position, your “brain on uncertainty” doesn’t change how it goes about making judgment calls in uncertain circumstances. The basic process steps through the context-belief-perception cycle because it can’t help it.
- Uncertainty means — at least to part of your neural and white matter networks — that a black bear, ready to eat all your apples (and you with them) could be just around the corner. The more uncertainty, the more you can realize how much you are relying on contextual clues in order to make sense of the situation.