My brain is on drugs and I fear this is one of the primary root causes of why my trading has been so erratic recently.
The drug is called dopamine and it is one that is released naturally by the body. There is an increasing amount of evidence being gathered by researchers on how excessive gambling affects the brain. A crucial role is played by dopamine neurons in helping the brain to recognise a reward, such as winning on the roulette table, eating a piece of dark chocolate or closing out a winning trade.
It is relatively easy for this mechanism to become short circuited which can result in gambling addition, or in my case, always looking for the next big trade and risking too much to get it.
When I came across this research a few days ago and looked back on my trading so far this year it became clear to me that I have fallen prey to a function of my brain’s chemistry.
During this look back it is obvious that the problem started last year when I had a couple of big winning months in a row. The large profitable trades that underpinned those stellar months were the hook that got my dopamine neurons all excited.
Ever since then I have trying to stick to my trading plan as much as possible.
When I examine the times that I have strayed and strayed badly from my plan it has almost always been about placing a much bigger trade than I normally would. In the lead up to these sort of trades I would have been trading rather well, with a good string of profitable small and medium sized trades. I was in sync with the market, felt good about my trading and seemed to have a handle on how the market was unfolding.
Feeling that I was trading well and that I should capitalize on that I would enter a trade or two using my highest allowed leverage level. I would stick to my maximum leverage for an individual trade but I’d enter two or more trades relatively close together price wise, in effect upping my leverage.
Unbeknown to me, I was looking for another dopamine rush. Another big win, so as to relive the highs I had experienced late last summer.
The most recent example of this is the couple of large trades I placed in mid-March that ended up going against me, along with two more trades I got stopped out on today.
Today’s two losing trades were anti-hedge trades I entered to try and recoup my losses on those USD-JPY and USD-CHF trades from March. At the beginning of the week I re-entered on both pairs at the same levels at which my stop losses had been hit. While EUR made decent progress against the dollar for the first four days of this week, the yen and Swiss franc were totally rangebound.
If EUR-USD were to break 1.60 there was a pretty good probability that JPY and CHF would follow suit in pushing the dollar lower.
After recognising my dopamine problem earlier this week I made a decision that come what may of the trades I had on the books, I would revert to only trading EUR-USD going forward.
After trading multiple pairs for nine months I think it is pretty obvious that I’m just not well suited to it. Especially in contrast to the prior fifteen months that I had solely focused on trading just one currency pair, EUR-USD. While my returns might have been slow and steady they were consistently moving in the right direction.
The one common factor amoungst the four main currency pairs is that the US dollar is part of them all. More often than not, I’m trading on the direction of the US dollar and not on the other currency that makes up the pair. If I end up placing trades on multiple pairs all based on what way I think the US dollar is going to go then I’m not really taking advantage of the multiple pairs.
All I’m doing is fooling myself into thinking that I’m diversifying my risk amoungst those disparate pairs, when all I’ve really done is increased the leverage of the trades I have open. While this may have brought me greater returns in the beginning, it has come to bite me in the ass one too many times now, not just in the form of monetary losses but also by adversely affecting my behaviour, my perception of risk and reward and how I trade.
So while the US dollar bulls came out in force today and scuppered my anti-hedge trades I feel that I’ve actually made some really positive progress this week.
The losses I suffered today were an attempt by me to claw back the large losses I had suffered last month. Since the size of the trades were equivalent to those from the original trades my actual losses are a greater proportion of my account. My monthly return is not going to be pretty, since I’m down around 40% now.
Those initial losses were placed in an attempt to experience that dopamine rush. The anti-hedge comeback trades were a follow-up attempt to experience the same thing. The wonder of the brain is that I probably did experience a small dopamine rush when I placed those trades, as I looked forward to the reward that was coming to me when the trades were successful.
I have to break the cycle, and that starts here.
I’m going back to basics. One currency. One direction.
To help me reboot this process I’m going to sign up to Jacko’s group, which has been discussed extensively on Forex Factory. I think a quick educational refresher course might do me a world of good.
My brain’s just going to have get by with the small dose of dark chocolate I have for lunch every day.