Thursday Trader's Tip: Dopamine
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Welcome to Thursday Trader's Tip — the free edition of The High-Performing Trader newsletter. Each issue presents to-the-point trading psychology advice that can be read in under 5 min.
This week's post is about dopamine and trading loss.
The brain's motivational system is much more complex than what brings out to the public. We hear that dopamine gets released with the achievement of a reward. However, studies show that the release of dopamine happens before the reward, with our brain’s ability to predict it.
Dopamine signals success, but it also signals when you only manage an uncomfortable near-miss.
Research on roulette players found that their brain's nucleus accumbens — part of the neural circuit that controls reward-seeking — showed activity when they experienced near-miss losses, much like when they had won. In this case, dopamine seems not to be signaling pleasure but indicating how close they got to the reward and encouraging another attempt. This is what gives them the urge to keep playing much of what happens with impulsive trading.
Did you know that casinos use this mechanism in slot machines to keep people playing? They design games that seem like a win is imminent, only to barely miss it in the end.
So, in trading, when the price barely misses your take profit for a few points, on a biological level, your brain is going to be your worst enemy. It anticipates a reward with dopamine, but if the expected reward isn't achieved, dopamine levels plummet below baseline, leaving you overly frustrated and sad. This effect is worse than an immediate loss where your expectations are way lower. The result? You’ll want to keep on trading in an attempt to recapture that anticipated reward — money.
Although this mechanism is used everywhere at casinos to manipulate people into continuing to gamble, we are not in the gambling business. This is just one of the many human traits that hinder progress toward trading success.
If you want to take trading as a probabilities game, you need to learn to intentionally counter the chemistry of your brain. The best way to do this is to anticipate a loss.
The best way to take a loss is to anticipate it.
If you go into a trade with the worst-case scenario in mind, you’ll build a protective layer against frustration and control the dopamine levels to your advantage.
Before the session or even before entering each trade, take a moment to close your eyes and imagine the price going against you while maintaining a composed and calm state of mind. Consistently practicing this exercise will create a new mental association in your brain — a calm state with an unpleasant emotion. And this prepares you to better handle loss.
Happy trading,
Sara
P.S. If you want to read the entire newsletter ‘On Becoming a Great Loser’, click here.
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Sarah, I always like how your solutions involve pausing and intentionally changing our behaviors. We allow the market to be as it is. As Jim Rohn said: If you will change, everything will change for you.
Hey Sara this is a topic very relevant to our generation. I don’t think there’s ever been a time in history where people’s psychology and brain chemistry has been exploited so much by media and businesses with an agenda of their own. This reminds me of the live class where the poker player guy (sorry forgot his name) mentioned how the anticipation of reward produces dopamine. Not just the reward itself. Yes the gambling business leverages this. That exercise is a good idea I’m gonna practice that. Visualizing a loss happening and moderating the reaction.
I enjoyed the video it was nice to hear you talk about your approach! How life is outside of trading is definitely important. You’re a better trader than me, and I feel weird giving you tips, but when you talked about maximizing winners on higher timeframes, it got me thinking of what Jim Dalton said. If anyone doesn’t know, he popularized the market profile, and he shared a technique akin to taking the price range of a balance area from low to high, multiplying it by three, and using that as a take profit during periods of imbalance/trend. In the times I backtested it, it caught the bulk of movements well before they consolidated again. Doing this with the higher timeframe balance areas that the higher timeframe trends come from might help with optimizing the sizing/timing of partials