Relevance of Brain Plasticity in Trading

The old cliché in trading is that it's 80 percent psychological and 20 percent money management. The reality is that the psychological challenges traders have to endure from day to day require a systematic mental approach to performance optimization. Traders are extremely susceptible to instant performance feedback. In the book The Trading Athlete, author Shane Murphy, a sports psychologist who served as a psychologist for the U.S. Olympic team, draws the comparison between day traders and Olympic athletes and the mental fitness both professions require. Like professional athletes, day-traders are affected by the pressure to constantly obtain desirable results. However, unlike professional athletes, traders do not go through practice and exercises to work on their mental/behavioral approach in order to perfect their craft. In the book, the author suggests many techniques like cognitive behavioral therapy (CBT) and neurolinguistic programing (NLP), which are both useful and efficient. But any professional athlete will tell you that the most efficient way to obtain and maintain top performance is through constant practice/training and performance monitoring (generally with the help of a coach). Considering the day-trading profession only offers on-the-job training opportunities minus the coach or instructor, how can traders train in order to optimize and maintain their mental fitness and discipline? (Keep in mind, demo/mock trading is not valid practice.) Can brain plasticity and neuroplasticity techniques be used as tools for traders to "practice" their mental fitness?

What Is Brain Plasticity?

Brain plasticity, also known as neuroplasticity, is the ability for the brain to change itself physically, functionally, and chemically throughout life. It is related to changes in neural pathways and synapses due to changes in behavior, environment, neural processes, thinking, and emotions. The capacity of organisms to change is a fundamental characteristic in most nervous systems and can be seen in even the simplest of organisms, such as the tiny worm C. elegans, whose nervous system has only 302 cells, while the human brain has about 100 billion nerve cells (neurons). Cognitive scientists have always assumed the nervous system is especially sensitive during childhood and early brain development, but in recent years this assumption has been challenged by new findings revealing that many aspects of the brain remain plastic throughout an individual´s lifetime. When there are changes in the nervous system, there is often subsequently a correlated change in behavioral or psychological function.

Neural networks are composed of individual neurons, each of which connects with a subset of other neurons to form interconnected networks. Plasticity occurs at the junctions between neurons through a process called synapses (a synapse is a structure that permits a neuron to pass an electrical or chemical signal to another nerve cell).

Factors that are now known to affect neuronal structure and behavior include the following:

experience (both pre- and postnatal)

psychoactive drugs (e.g., amphetamine, morphine)

gonadal hormones (e.g., estrogen, testosterone)

anti-inflammatory agents (e.g., COX-2 inhibitors)

growth factors (e.g., nerve growth factor)

dietary factors and nootropics (e.g., vitamin and mineral supplements, piracetam)

genetic factors (e.g., strain differences, genetically modified mice)

disease (e.g., Parkinson’s disease, schizophrenia, epilepsy, stroke)

stress

brain injury and disease

Why Brain Plasticity in Trading?

The brain needs to be conditioned in the same manner the heart is conditioned to stay healthy – each day through aerobic exercise. This is why brain-training exercises are sometimes referred to as "neurobics." Traders can improve the neuroplasticity of the brain by doing neurobic exercises in the same way they exercise their physical body. The need for a trader´s brain to be mentally fit is more relevant now than ever. The dynamics of the financial markets are constantly changing due to globalization and technology. With the influx of automated trading, some of the old axioms and knowledge that was needed to trade are almost obsolete in the current trading landscape. Traders have to constantly adapt and rearrange their trading methods. So, having a fit brain that can rewire itself to adapt to the market changes can ultimately be beneficial. Moreover, it is well documented and well researched that trading causes a lot of stress. According to research by Fuchs, Eberhart and colleagues in "Adult Neuroplasticity: More Than 40 Years of Research," under stress, the geometric length of the apical dendrites of pyramidal neurons in the hippocampus shorten. (Dendrites are the branched projections of a neuron that act to propagate the electrochemical stimulation received from other neural cells to the cell body, or soma.) Daily brain exercises can protect against the ravages of stress. Stress has been shown to reduce the neuroplasticity of the brain. When dendrites retract, the surface of the neurons shrink, then the number of synapses and neural connections are reduced. This dendrite retraction has been also observed in other areas of the brain under stress. However, once the stress is reduced, the synapses are replaced.

Neurobic Exercises for Traders

Switch Your Market View

The best and easiest way for traders to work on their brain plasticity is by strengthening their neural pathways and changing the patterns of everyday activities. Switching the market's perspective forces traders' brains to adapt by expanding new neural connections. For example, if a trader has a habit of trading the market on the buy side (bull), he/she should take a minute to print the buying chart strategy and flip it upside down and try to analyze this strategy from a seller's (bear) perspective. This technique will not only strengthen traders' brains over time, because thinking and analyzing help grow dendrites, but it will help them see what the other traders are thinking and open the door for new trading opportunities.

Neuroplasticity Training Programs

With the advancements of the cognitive and behavioral science fields, more attention is being paid to the many biases that often lead to irrational thinking and decision-making. The ability to train the brain to operate outside biases, presumptions, and perception is a powerful tool in trading. Some of these training programs also come with games that address problem-solving, mental speed, flexibility, memory and attention, which are important factors that can help some traders with anxiety and impulse trading.

Physical Activities

A recent study conducted at the University of Adelaide in Australia suggests that one 30-minute session of vigorous exercise can lead to changes in the brain that make it more “plastic,” including improvements in memory and motor skill coordination. A similar study conducted at the University of Illinois at Urbana-Champaign found that regular exercise can benefit the brain’s supply of white matter, also known as “the subway of the brain” due to its ability to connect different regions of grey matter in the cerebrum to each other.

Brainwave Entertainment

Brainwave entertainment is probably the most convenient technique for traders while trading. It is a well-known fact that music and sounds affect emotions while stimulating both the right/left brain hemispheres. In the financial markets, however, many fail to fully develop their right brain when trading, but specific sounds like binaural beats, which have been proven to promote left- and right-brain hemispheric convergence, can help traders to have more access to their whole brain. Meditation music and binaural beats can also stimulate select brain waves. In a recent article, “A Closer Look at Neurofinance in Trading,” we discussed the effects of trading on brain waves and how traders tend to have higher beta frequencies than the normal population. The problem with functioning on high beta frequencies is that delta/beta cycles cause an elevation in blood sugar levels and blood pressure throughout the day. Without a retreat to the alpha and theta waves, concentration, relaxation and overall health are compromised. To solve this issue, there are many things traders can do to increase alpha waves and replace stress and anxiety while enhancing mental performance. One is intake of the amino acid theanine found in green tea leaves and in the truBrain nootropics supplement. But meditation music and binaural beats are instant "engineered frequencies" designed to massage the brain and stimulate the production of alpha and theta waves.

Brain Training Rules

Brain-training exercises should be approached with caution. Like physical exercise, not every exercise is good for the individual, and should done with moderation.

Try to avoid scientifically unproven mental training exercises. There are many brain games on the Internet that are labeled "neuroplasticity exercises" that do not have scientific validation.

Make sure the training and exercises are balanced, because too much can cause overstimulation of the brain.

Look for improvements in your daily life functioning. Test scores can improve in exercises, but these improvements should also be reflected in your daily functioning.