emotion vs. prediction

Northeastern Univ. Professor Lisa Feldman Barret says she has found the specific location in the brain that is the "epicenter" of predictions. Her report asserts that limbic tissue which helps create emotion is the center of predictive ability.

In recent years, scientists have discovered the human brain works on predictions rather than reacting to outside sensations as previously thought.

This information might call into question the relationship between emotion and predictive behavior for traders. Most top traders have agreed that keeping the emotions under control, perhaps even sublimated, is important to good trading.

I wonder if sublimation of emotion lends more energy to the predictive function or if it would have the opposite effect. It seems common among successful traders to deny predictive bias in favor of following a system...or price action based on probability. It always seemed to me that the one serves the other.

Now that emotion and predictive behavior seem to come from the same place, I wonder how this will change our thinking. I would expect to hear from NLP experts in the future as they work with this new information.

As so often in trading the human factor is the weak part of the system.
So many now are trying to make prediction entirely machine based.

pennycapitalist said:

Northeastern Univ. Professor Lisa Feldman Barret says she has found the specific location in the brain that is the "epicenter" of predictions. Her report asserts that limbic tissue which helps create emotion is the center of predictive ability.

In recent years, scientists have discovered the human brain works on predictions rather than reacting to outside sensations as previously thought.

This information might call into question the relationship between emotion and predictive behavior for traders. Most top traders have agreed that keeping the emotions under control, perhaps even sublimated, is important to good trading.

I wonder if sublimation of emotion lends more energy to the predictive function or if it would have the opposite effect. It seems common among successful traders to deny predictive bias in favor of following a system...or price action based on probability. It always seemed to me that the one serves the other.

Now that emotion and predictive behavior seem to come from the same place, I wonder how this will change our thinking. I would expect to hear from NLP experts in the future as they work with this new information.

Click to expand...

It is not so much about keeping the emotions under control. It is about becoming aware of them. everything we do is based on an emotion of some kind, so they are very important if not everything.

Prediction by its very nature tends to engage the emotions in a negative way. When you predict something you naturally have an idea of an outcome, an expectation, what happens when that does not materialize?

Not quite sure at his point what her article says but will google it at some point.

personal i think none can control emotions the whole day, except you are a robot.
that's why i think HF-Trading is fully automated and mid-long term trading is filled by humans

my2c

ProFXManager

pennycapitalist said:

I would expect to hear from NLP experts in the future as they work with this new information.

Click to expand...

I'd certainly expect to hear from them (as self-promotion seems to be one of their primary aspirations) but I'll be far more interested to hear from further neuroscientists.

alexaherself said:

I'd certainly expect to hear from them (as self-promotion seems to be one of their primary aspirations) but I'll be far more interested to hear from further neuroscientists.

Click to expand...

Only a matter of time before the clever guys figure out how to make geniuses out of mere mortals. Genes I expect.

Pat494 said:

Only a matter of time before the clever guys figure out how to make geniuses out of mere mortals. Genes I expect.

Click to expand...

I'm still hoping they won't make geniuses out of them, but rather soap and broomsticks. Why bother with Justin Biebers, when you can have David Gilmours?

Euphoria (long)

Most top traders have agreed that keeping the emotions under control, perhaps even sublimated, is important to good trading.

Last Wed. I put in an order to short Sears. The order was rejected for lack of shares to borrow. Sears stock went down I believe $4, and I was disappointed.

After the close, I remembered puts. Duh! I could get a barely out of the money put for $1.02. I decided to check to make sure the stock was still going down and buy a put on Thursday, but I slept late and the price had already gone down another $4.00 a share when I woke up and the price for a put was more than before. So I resolved to go to bed earlier and get up 3 hours before market to read my IBD and have my orders ready. Sears went down, I believe over $6.00 so I was right the market...but made nothing.

Friday, I got up early read every word of Investor's Business Daily(which is my discipline), but had no sense for the market other than a bit bearish. I was upset that I had left a really good profit slip through my hands when I heard Oculus Rift was about to announce something big. My son, a computer game artist, had told me about Oculus over a year ago so I was excited.

I looked it up and found it to be a cheap penny stock. Now, I was Euphoric, remembering my son's alert and finding this cheap stock. I bought 10,000 shares as I waited for the product news. I even read the SEC 20Q form and I could see no downside. Whatever limited my purchase to only 10,000 was trying to tell me something but because of euphoria, I could see no risk.

I remember even giggling a little as I contemplated my coming gains...then I began to remember why I hadn't bought it when my son told me about it. First it was a private company...then Facebook had bought them out.

What had I bought? The euphoria began to fade into despair as no risk changed into all risk! I was getting sick to my stomach at my stupidity. I checked for news and found where the CEO had issued a recent disclaimer that this company had nothing to do with Oculus Rift!

The price went south; I was foolishly down by $400. Thank goodness I had only "invested" $1200. I put my SEC reading study to the side and started listening to some tapes by Mark Douglas.

He talked about fear and how it closed off the ability to see possible outcomes until all one can see is negative. He talked about euphoria and how all one can see is positive and risk is impossible to see. Wow! For $1200 I had just learned a lesson about trading, business, and life that has been costing me fortunes for years.

I was tempted to sell my "Oculus" for a loss and move on lesson learned. Moving into the "ZONE" I began to see more risk...and more possibilities. I remembered the "Greater Fool Theory!". If I made this mistake, someone else could make it even worse than me. I had bothered to read the SEC filings. I was just too euphoric to figure out what I was reading couldn't possibly be the Oculus I wanted it to be.

The "ZONE" is a place of maximum awareness. It is not euphoric, so the risks are evident. It is not panic, so maximum possibility can be seen. I knew I had made a terrible mistake, but I could turn it into a valuable lesson. I could also see the possibility of a greater fool than myself. I could have sold for $400 loss, but objectively I could see the possibility of still making a small profit and learning an even greater lesson.

I decided to put in a limit order to sell at a small profit and let the order ride for 5 days. Though this company had no current business a couple of the officers of the company a couple of months ago had bought several hundred thousand shares at a price that would give me some of my money back. Maybe they would get a new contract this week. No fear...no euphoria...I could live with the loss and see a possible gain...maybe even the probability of a bigger fool than me!

This morning I missed the opening bell. I had an appointment to get a tooth implant. When I got home around lunch and opened my platform, I see that I had sold 273 shares at a profit. As I called my wife to witness in a new state of "Euphoria" I sold more shares until I only had 59 shares left.

Mark Douglas says I need to learn to never trade when in a state of euphoria, but it is a good time to spend with the wife. At my advanced age I can hardly believe I am just now learning this lesson...but I have.

I hope others can see from my stupid experience the dangers of both euphoria and fear. There is a reason why the great traders cultivate an even sense of awareness. I am only learning because others have shared. I had rather not tell people how stupid I can be when in an euphoric state...but if anyone can learn from this I can live with the shame...especially since I turned it into a profit!

This paper has a similar topic and deals with the effect of emotion on risk taking in financial decisions. It has significant insight into the neurological reasons for investors' risk-seeking behaviour and diversion from systematic trading rules.

I need to read this paper again a couple of times and maybe get out a diagram of the brain to get a good feel. It covered the way the information we accept for use in updating is biased according to our emotions which is important to understand. It mentioned, I think, that those who are confident in their ability to estimate probability will venture into higher risks more than those who are less confident.

However, I have noticed that who have experienced great loss and poor performance over a long period of time will often go for the highest risk long shot over the calculated risk. It hurts the emotion to lose over and over again, therefore if they choose the long shot they don't have to blame themselves for being wrong again. No one expects the long shot to win, so the loss is not as personal as if one had calculated to win...and still lost. So the emotion of fear can blind us to any positive outcome and push us into a negative result. The emotion of euphoria can blind us to any negative risk and push us into a negative result by unseen but very real risk. Our goal should be to maintain a state of maximum awareness of both positive and negative probabilities and update as clearly as humanly possible.

pennycapitalist said:

Northeastern Univ. Professor Lisa Feldman Barret says she has found the specific location in the brain that is the "epicenter" of predictions. Her report asserts that limbic tissue which helps create emotion is the center of predictive ability....

Click to expand...

This topic is so interesting... and not jsut for trading but for all risk management operations in general. Going to give this thread a thorough read!

Experiment in emotion

I was trying to quantify the series of indicators I use to help me trade, and discovered something interesting about myself. The indicators are Price Action, 7,14 moving average, 7 day RSI, and MACD. I loaded five years of data for a stock and adjusted the screen so I could quantify each indicator for the day's close as plus or minus, With weight going to Price Action only in case of a tie, I calculate a composite "indication" and then click forward one day to compare the "indication" to the reality.

I learn that my composite indicator is right about 60% of the time, but is much higher when trending, and around 50% when consolidating. More important I learned that I felt an emotional hit once I had an indication when the click revealed it was incorrect. I wanted it to be right and felt the hit when it wasn't.

By thinking the word, "indication" rather than prediction, I escaped part of the emotional hit. With practice, I hope to train myself to trade the series of probabilities and not charge each piece of data with emotion.

I want to keep myself in a state where I am aware of all the probabilities and accept each of them as a natural part of the trading experience---the final experience being winning in the probability of my system and not on the luck of the next price action.

Here is another side to possible brilliance.

http://q13fox.com/2014/10/08/nobel-...es-are-all-grown-up-so-how-did-they-turn-out/

Did Einstein have any children ?

Predication can be dangerous in trading in my view, the moment you predict you are shutting down the possibility that the opposite of what you predict will happen... Of course there is always prediction in taking a trade, but knowing that it is only a personal perception may help in not shutting down the other possibilities and being nimble about the all thing.

Fugazsy said:

Predication can be dangerous in trading in my view, the moment you predict you are shutting down the possibility that the opposite of what you predict will happen... Of course there is always prediction in taking a trade, but knowing that it is only a personal perception may help in not shutting down the other possibilities and being nimble about the all thing.

Click to expand...

I read somewhere, maybe market wizards, that one of the great investors always had the "it'll never happen " attitude to all his trades.
It could be in life that one naturally builds up a negative view of one's actions especially in others etc. which will beat you in the end. Could be a way of lancing this mental boil ?

pennycapitalist said:

I was trying to quantify the series of indicators I use to help me trade, and discovered something interesting about myself. The indicators are Price Action, 7,14 moving average, 7 day RSI, and MACD. I loaded five years of data for a stock and adjusted the screen so I could quantify each indicator for the day's close as plus or minus, With weight going to Price Action only in case of a tie, I calculate a composite "indication" and then click forward one day to compare the "indication" to the reality.

I learn that my composite indicator is right about 60% of the time, but is much higher when trending, and around 50% when consolidating. More important I learned that I felt an emotional hit once I had an indication when the click revealed it was incorrect. I wanted it to be right and felt the hit when it wasn't.

By thinking the word, "indication" rather than prediction, I escaped part of the emotional hit. With practice, I hope to train myself to trade the series of probabilities and not charge each piece of data with emotion.

I want to keep myself in a state where I am aware of all the probabilities and accept each of them as a natural part of the trading experience---the final experience being winning in the probability of my system and not on the luck of the next price action.

Click to expand...

Good work, going back over your track record. And yes, everything's easier when you're part of the trend.

Pat494 said:

I read somewhere, maybe market wizards, that one of the great investors always had the "it'll never happen " attitude to all his trades.
It could be in life that one naturally builds up a negative view of one's actions especially in others etc. which will beat you in the end. Could be a way of lancing this mental boil ?

Click to expand...

yes, they do and they obstruct our perception in our next endeavour, it is a pain avoidance mechanism......

http://www.trade2win.com/boards/psy...206422-emotion-vs-prediction.html#post2561090
Thats the one. Concentrate on being the fool who helps the greater fool doos what they want.
Another book you might be interested in is 'The Behaviour Gap'


In a 10 yard loser? Aim for a 5 yard loss.
In a 10 yard winnner? Aim for a 15 yard win.

And feel no way about either situation. Not hard really is it.

I think you need to be concentrated during the process of trading. Emotion is not something what helps you to be concentrated.

No, focusing is all but impossible when you're nervous or anxious or even excited. Which is why it's so important to learn to control your emotions. The problem is, for me at least, that even if I control my emotions during trading afterwards I let and I feel the stress I would've felt a lot more keenly. In other words that control is just temporary. That can be very exhausting.