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Neuroscience in Trading :Anirudh Sethi

  
Analysis, Education
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Image result for Neuroscience in tradingTrading is an interesting field to say the least. It revolves around a great deal of decision making, and a lot of choices which will have diverse effects. What is responsible for the decisions made? Naturally, the trader’s thoughts and considerations in relation to his or her trading experience. So, to a certain extent neuroscience comes into the picture.

Neuroscience refers to the way the brain works, along with its cognitive functions. In fact neuroscientists focus their studies on the human brain, and how it has an impact on behavior and thinking functions.

Financial decisions are very important, and it goes without saying that they are affected by the individual’s financial literacy, experience as well as cognitive constraints. Decisions are also affected by one’s level of confidence, level of objectivity, and the element of risk involved. The amount of money involved is also prevalent, as the higher it is, the bigger the risks are and the more cautious one is more likely to be, as long as greed and over confidence do not cloud one’s decision. Thus, there are several factors which all have an effect on the decision that is finally made.

Therefore the neuroscience behind trading decisions is a very complex matter. Despite efforts to try to understand how the brain works and how it effects trading psychology and the subsequent decisions made by traders, one cannot say for sure how it all works out as there are so many factors and issues involved. There are however some patterns and trends that were noted after neuroscientists conducted certain studies in this regard.

For instance, there is a general belief that traders invest in a diversified portfolio in order to limit risk, and once this is done, they are less pressured to make substantial trading decisions since they have their investments spread out quite well. There are others who prefer to take bigger risks because they want to stick to certain stocks only, because they have a belief that they are going to do better off that way. Evidently in this case pride and confidence comes into play. (more…)

Important goals for traders

  
  Education
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1) Risk management goals – Goals pertaining to trade sizing and drawdowns;

2) Idea generation goals – Goals pertaining to the process of generating sound trading ideas and formulating these into plans;

3) Execution goals – Goals pertaining to implementing trade ideas/plans so as to maximize reward and minimize risk;

4) Position management goals – Goals pertaining to the management of positions once they’re entered, including hedging and scaling in/out;

5) Portfolio management goals – Goals pertaining to achieving good diversification among ideas and allocating capital effectively to those ideas;

6) Self-management goals – Goals pertaining to maintaining a constructive mindset for optimal decision-making;

7) Personal, non-trading goals – Goals that reflect desired outcomes in areas of life outside trading that might spill over into trading performance, including physical fitness, relationships, spirituality, etc.

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