Tuesday, May 1, 2007

Fight or flight

I have a theory about adrenaline. It's a break down on how it's natural to let your losses grow bigger and cut your profits short.

When I'm in the loss and I mean bigger loss, or around stop loss level adrenalin kicks in my body and with it "fight or flight" mode for response. I'm in a loss and I have a chance to fight and win over a losing trade. Because my body is in fight or flight mode I chose fight and than I fight, fight, fight. I add new positions by averaging down, I move stops making them bigger and bigger, I risk enormous percentages of my account. All of that represents fighting. None of that I do because it's good for my trading account but because I chose to fight. Nothing matters, fight mode is chosen and I just fight.

I usually fight only in losing positions, than there is logic for it. Adrenalin is high in my body, I check around to see why and than I spot the reason, losing trade. I make a judgement that it's safe to fight and that it's worth it and I start fighting. Maybe it's safe to fight for my body because from losing trade and fight with it I can't lose a hair from my head. It's not safe for my account. Question is about what to make decision in that situation about body or account. Adrenalin is flowing in to the body and helps to respond because there is some kind of a threat. Nobody told to the body that threat is about trading account and profits. Maybe it would be a good thing to feel actual pain in my body with every down tick, than I wouldn't fight so bravely.

On the other side when I'm in wining trade, again there is adrenalin in some moment. Maybe because profit started to get big very fast or just big for my perception. It's not important, only thing that's important is that adrenalin is here again. Again I have flight or fight choice to make. Now is the question against whom I can fight, who or what is the threat? There is no losing trade. Winning trade with every tick make adrenalin flow bigger. I got to chose, it's hard for me to be in rising adrenalin flow, it's not pleasant feeling. Idea comes that I could lose unrealised profits and I respond to that as origin of threat. What can I do? I can flight from threat situation and save the unrealised profits. It's better thing to do than to stay and fight. The fear is not concerned with possible future gains, they are not in my conscious mind at all. Here is only unrealised profit that is real, and it's in clear and present danger. I don't have a object with what I can fight, I chose flight and in the moment I'm out of the trade. Profits are saved and level of adrenalin can fall.

8 comments:

Lloyd said...

I really like this posting. You've basically summed it up for me. The threat of losing a quick unrealised profit is very real especially during news releases.

Various unforseen knee-jerk reactions often make me disobey my exit rules and hence booking a smaller profit due to early exit, eventhough I am on the right side of the news.

Would it make us better traders if we learn to FIGHT to stay in the right market and not tempted by the profit at least until you think the move is over (i.e. based on technical readings rather than feelings)?

FX said...

I believe that we can't do much at first. That I can't fight with my mind or body responses. But through time we get trained and gain endurance, so adrenaline rushes won't have such a strong impact. I remember back when I started trading few years ago I couldn't stand losing 2 pips if I was 7 pips in a profit. It's funny but it's true. So it's all in staying above the water and trading and getting better slowly. As much the market is variable in my trading I'm variable that I need to count in also. I can't trade as I would like to trade, I can't perform on a level that I think I should while I'm offline. The thing is to get good enough in trading with all imperfections.

Unknown said...

I don't wish to sound critical, but your analysis is a little bit incorrect. Allow me to introduce myself. I am a physician (ER) with a great deal of experience with adrenalin.

First, let's look at the biological role of adrenalin:
Let's say you're walking down a path and a tiger jumps out at you. Instantly, you perceive a threat and adrenalin is released. This is a response that is AUTOMATIC and not under conscious control. The immediate response is, as you note, to prepare your body for "fight or flight". But, beyond increasing your heart rate, blood pressure, and blood flow to your muscles, IT ALSO DOES SOMETHING IN YOUR BRAIN! Namely, it shifts blood flow AWAY from the frontal lobes to the motor cortex. After all, you don't need to do any long-term planning at this point. Either you survive - or you don't.

This response is very beneficial in acute, MILD stress. In biological terms, 'mild' means you are not having your limbs torn off or exsanguinating. Acute means lasting <5 minutes. These are biological definitions and, unless re-stimulated, that is roughly how long the "adrenalin rush" lasts.

The important thing is that we are no longer at risk for tiger attacks, but our automatic response to threat is still the same as if a tiger had just jumped out at us. And if we are in a trade, this same sequence of events still occurs. Remember, it's automatic. Now, every one points to the obvious physiologic responses that WE CAN FEEL. You report that this is uncomfortable - it's not. It's only uncomfortable because you are sitting and trying to remain calm. If you were a pro athlete, you would want this to occur during a critical point in the game - hence the term 'adrenalin rush'.

BUT WHAT YOU CAN'T FEEL IS THE REDISTRIBUTION OF BLOOD FLOW IN YOUR BRAIN.

And this is what destroys us as traders. Remember, blood is flowing TO the motor cortex and AWAY from the Frontal lobes. (The governor or long-term assessment and planning part of the brain.) Normally, it functions as a damping mechanism to reduce or counteract the effects of emotion on our decision-making processes. But because of the presence of adrenalin, we have an overwhelming URGE TO DO SOMETHING - NOW! And all our thought processes are directed to threat and elimination/avoidance of that threat. So we make abrupt, impulsive decisions.

Now, here's the take home message. There are a number of things that you can do behaviorally, but not cognitively. (Remember, the thinking brain is shut off for ~5 minutes). So, you can force yourself to wait 5 minutes, do jumping jacks to 'burn off the adrenalin', and, most importantly, use visualization BEFORE you enter the trade. You would visualize yourself entering the trade and rehearse every situation and prepare your responses to each possible event. In that way, you don't perceive a threat, but a contingent event - so you don't develop a threat response. And, if somethng totally unexpected happens, you would have prepared a plan, like "exit immediately" or do a quick scan of the news wires, etc.

This is a long post because everyone misunderstands and over-simplifies the 'fight or flight' response. I hope I've put it into better context for you.

GL & GT

FX said...

Hi bhong,
I got to say thanks for your comment, I appreciate deeper explanation what is happening with adrenaline and threat situation in trading. I especially liked the solution ideas that can be used in such situations. It's true that if I have made visualisations of possible outcomes bad or good I would be more prepared. So it's not enough to make trade analysis before the trade but after entry make visualisations of outcomes, not just stare in chart and be on mercy of the feelings.

HPT said...

Nice post FX.
I deal with the adrenaline response a lot of the time too when trading. I get adrenaline pumping before I even enter a trade. It normally occurs when I'm thinking about entering during volatile trading conditions, or when I'm contemplating putting on a reversal trade. I always get the adrenaline response when I'm in a bad trade. What has helped me is being stricter on my stops and just saying "F' it" and exit, "I've had enough of this loser trade, I'm getting out". I've come to the realization that the adrenaline is a sign that my confidence in the trade has deteriated and that I need to tighten my stop or just exit all together. What helps me when trading is talking aloud about my thoughts. Many of the thoughts are 4 letter words, but swearing makes me realize that I need to get out, not add to the trade. If I'm swearing I've put myself in a situation where I'm uncomfortable with the percieved risk to reward. The adrenaline makes me have to urinate a lot more too.

FX said...

Thanks John. I'm glad that you like my post. I'm everyday reader of your blog so I appreciate your opinion. Like you said adrenaline can be used like some sort of indicator.

Unknown said...

Hi FW
Yesterday I kind of dashed off a fast response to your blog. Here is a more detailed response that I also sent to Dr Brett steenbarger:

But the story of acute stress and the brain is even more fascinating. Adrenaline is released immediately upon a perceived stress. Even THINKING about a threat can cause this. Man, as far as we know, is the only animal that can create his own stress, just by thinking about it!

The adrenaline then causes immediate cortisol synthesis and release. As it increases heart rate, blood pressure and redirects flow away from the skin and digestive organs and to the muscles and the brain, the cortisol is transported directly to the brain. This takes time but, for all practical purposes, is instantaneous. There, cortisol mediates the changes in regional cerebral blood flow.

But, it does some even more interesting things. As I said, it shifts blood away from the frontal cortex but it also makes the Amygdala MORE RESPONSIVE AND MORE LIKELY TO ESTABLISH MEMORIES. The Amygdala is that portion of the brain that adds emotional context to newly formed memories. And then these memories, when recalled, are associated with those strong emotions. This, incidentally, is how we think that PTSD starts.

Even more important, ONLY ONE REPETITION may be required to form a lasting memory. After all, how many times do you have to have a tiger jump out at you before you learn to avoid tigers!

There is also one other point to consider. That is the role that Dopamine plays. As you know, dopamine is the reward chemical in our brain. And it also makes the imprinting of memories more likely to occur. After all, you WANT to remember what gave you a reward so that you can repeat it (like where to find food, how to avoid predators, etc if you were a proto-human.)

So now we're coming to the crux of the matter. When we perceive a threat and trigger our acute stress response, WHATEVER WE ARE DOING AT THAT TIME BECOMES IMPRINTED INTO OUR MEMORY - GOOD OR BAD! And IF WE GET AWAY WITH IT, THAT GIVES US A TREMENDOUS KICK OF DOPAMINE! And all this serves to immediately create a permanent memory or behavior.

But cortisol is even more interesting. Under conditions of chronic stress (by biological definition >30 minutes) cortisol then makes forming new memories even more difficult. Can you remember all the facts that you "learned" during your mid-term or finals cramming sessions?

So now, let's look at our poor trader. He makes a poor, impulsive decision that's not in his trading plan. It starts to go bad and, as he realizes that, his body automatically generates an acute stress response. Remember, all he has to do IS THINK ABOUT IT, and the body reacts, just as if a tiger had jumped out at him. The cortisol immediately gets to the brain, switches off the long-term analytical portion of the brain and makes him REALLY PAY ATTENTION to what's going on in the here and now. And he's laying down impervious memories all the while. Then, let's say the market reverses AND HE GETS AWAY WITH IT! WOW! HUGE REWARD!

We now have a biological explanation of why good people (traders) develop bad habits. The stress primes the memory systems and the Big Dopamine Reward nails it in. Later on, as he realizes this and tries to change it, he develops a chronically stressed state. Now, however, he has great difficulty in changing his bad habit or "re-learning" a new and better behavior. We have now developed truly self-destructive behavior pattern. And the more times we repeat the sequence, the more resistant we make this habit to extinction or control.

This all brings us down to the basics that you have been reiterating in your blog:

Have a trading plan.

Plan/visualize your trades and all its contingencies. That way you don't get sandbagged by the market and develop an acute stress response.

Maintain an even keel. However you like to do it. Relaxing music, biofeedback, meditation.

And practice, practice, practice! The more automatic your trading becomes, the less stress you will perceive. When your trading rules become so engrained that you can take a small loss without feeling remorse or regret, then you will be able to avoid becoming 'the good trader who does bad things'.

Hope this all helps.

FX said...

Thanks in my name and in name of all readers for further more detailed explanation. Information about adrenaline and stress in trading and it effects are everywhere obscure and in the same time needful. So any light on that domain is greatly welcomed.