03 April 2020

Mastermind: Breaking Down Your Trading Brain

Mastermind: Breaking Down Your Trading Brain

The human brain is the work horse behind everything we do – from processing and coordinating information to controlling our emotions and instructing our body’s physical movements and functions. Therefore, it’s no surprise that the brain also plays an integral role in your forex trading career, which is something that Greg and his friend Andy Harrington were recently discussing over on his YouTube channel – outlining what they termed the “three trading brains”. These are made up of the following:

  • Neocortex: thinking and leadership
  • Limbic system: feelings and emotions
  • Cerebellum: identity

In order for you to understand how these three parts of the brain influence your decision making while you’re trading forex, we’re exploring their different functions in more depth below. This will provide you with a better grasp of how your trading brain works and how to use this knowledge to learn how to trade forex successfully with the right mindset.

 

The neocortex

 

Definition: ‘The neocortex, also called the neopallium and isocortex, is the part of the mammalian brain involved in higher-order brain functions such as sensory perception, cognition, generation of motor commands, spatial reasoning and language.’

The neocortex is the largest component of the cerebral cortex and is positioned above the limbic system – or the emotional part of the brain. Often referred to as the thinking part of the brain, this area is in constant communication with the limbic cortex and governs our thinking and decision making. In the context of trading, it’s possible to train the thinking part of your brain to recognise and process specific patterns and signals, enabling you to make decisions quicker.

When you learn forex trading, it’s essential you begin to recognise repeat patterns from the get-go, as this will help train the neocortex part of your brain to process this information more quickly. However, relying solely on these synaptic strategies or becoming overconfident in your decision making isn’t advisable – you should always stick to your trading plan and consider every facet of the deal to optimise your success as you gain more experience.

 

The limbic system

 

Definition: ‘The limbic system supports a variety of functions including emotion, behaviour, motivation, long-term memory, and olfaction. Emotional life is largely housed in the limbic system, and it critically aids the formation of memories.’

Located near the edge of the main cortex, the limbic part of our brain controls our base emotions, from fear, pleasure and anger to driving instinctive behaviour such as hunger and caring for offspring. Often referred to as the ‘old brain’, these complex structures are typically fast to react, irrational and self unaware, unlike the neocortex that takes a more measured approach to processing signals.

When it comes to how this can impact real trading and even your practise trading when you’re still in the learning phase, it’s essential to keep your emotions in check and be aware of your current emotional state at all times. Going into forex trade deals with a negative mindset or fragile emotional state could lead to poor decision making, as the signals from the emotional part of your brain will negatively affect the reasoning and thinking element in the neocortex.

 

The cerebellum

 

Definition: ‘The cerebellum coordinates voluntary movements such as posture, balance, coordination, and speech, resulting in smooth and balanced muscular activity. It is also important for learning motor behaviors.’

Playing a key role in muscular activity, the cerebellum part of the brain helps to tie all the other areas together to carry out the end result of decision making – that is, the physical actions required to make a trade deal.

However, as Andy talks about in the YouTube video, this part of the brain is also considered the identity brain. By continually concentrating on making the right associations and linking them to positive emotions in the neocortex and limbic brains, you will eventually create a new identity for yourself as a forex trader.

This result is that your actions become easier, simpler and more automated as your brain begins to recognise these signals and emotions as you practise and learn them through trading. This will all go towards helping you build a solid understanding of how your brain works in order to perform better in the forex market.

While there’s still a lot we don’t understand about the brain and research into the complexities of brain activity is still ongoing, but if you begin to gain a greater understanding of how these three core areas work, you can start to put them into practise when trading the forex market for real.

To hear more about what Andy and Greg had to say on the importance and nuances of the three trading brains, watch the video on YouTube here. You’ll also find plenty of helpful articles on how to learn forex trading, the psychology behind it and more on our blog.