By Simon Kerr, Principal of Enhance Consulting
Q. Where do you suggest new traders begin?
A. (Phantom of the Pits) Get your office ready! Pick out your office where it is comfortable for you to have quiet time and a proper place to relax. Trading is going to be an all out effort if they expect to climb the mountain in front of them.”
“Comfortable to have quiet time”? What can anonymous guru Phantom of the Pits* mean by quiet time? Surely trading is a nerve-driven, caffeine-fueled frenzied activity? Well yes, and mostly no.
Trading can be high-adrenaline and quick action, but for the most part it should be considered and orderly, and carried out off a plan. Trading experts consistently recommend that traders begin their day with mental preparation – often recommending that traders still themselves by mediation or yoga. Mental rehearsal is also as important for traders as it is for golf pros. The plan and mental rehearsal allow traders to react appropriately to events through the trading day (and week). But what should the trader be doing in this quiet time, and what mental state is that exactly? Academic research can help us out on these questions, in particular the concept of “The Default Network”.
The development of brain imaging methods including MRI lead to a flurry of experiments to see which brain areas where active in which tasks. What emerged as a “side-finding” of these studies was that when the experimental subjects were taking a break or “not doing anything” – the brain was still very active – but in different areas.
For the anatomically minded the brain areas that lit up on scans when the brain was not actively engaged in a given task were specific bits of the medial prefrontal cortex, the posterior cingulate cortex, inferior parietal lobule, lateral temporal cortex, and the Hippocampal formation. Significantly the network does not include the motor or sensory cortex which “take in” and “act on” the world “out there”
Though these areas are in different parts of the brain (the front, the sides and the back) they are connected by nerve fibres and this network is now known as “the default network”. Interestingly there is a negative association in activity between this default network and the other parts of the brain. So that the more active the default network, the quieter the other parts of the brain (and vice versa).
In a complicated task requiring intense attention to “the world outside” the default network is very quiet. In a task that is mundane and routine the default network becomes active – in tandem with the person thinking about “other things” or daydreaming. The Default network becomes most active when a person is just daydreaming or “thinking” at which time all the other brain areas show no activity.
What is the nature of this Default Network activity? It is to do with “internal matters” of importance to the person – 1) autobiographical memories, 2) imagining the future as it might be for him/her 3) considering how other people see things (“conceiving the perspectives of others” as in the “theory of mind”), and cogitating on personal moral dilemmas. (This information was got from people by asking them what was going through their minds when the default network was seen to be active on scans).
Parenthetically, it is thought (but not proven) that a number of mental health conditions including Autism, Attention Deficit Disorder, Post traumatic Stress Disorder, Alzheimer’s Dementia and Schizophrenia may be the result of deficits in the Default Network.
In Schizophrenia auditory hallucinations, paranoid and bizarre delusions, and disorganized speech are common symptoms. Cognitive tests also reveal impaired memory and attention. The complex symptoms of schizophrenia could arise from an inappropriately active default network. The normally strongly defined boundary between perceptions arising from imagined scenarios and those from the external world might become blurry, including the boundary between a person’s self and those of other people.
To sum up the default network is the most active brain system when individuals are left to think to themselves undisturbed. The default network also increases activity during mental explorations referenced to oneself including remembering, considering hypothetical social interactions, and thinking about one’s own future.
These properties suggest that the default network functions to allow flexible mental explorations-simulations-that provide a means to prepare for upcoming, self-relevant events before they happen. This functional role may explain why the default network increases its activity during passive moments when the demands for processing external information are minimal. Rather than let the moments pass with idle brain activity, we capitalize on them to consolidate past experience in ways that are adaptive for our future needs.
To come back to trading, what is mental preparation other than “a means to prepare for upcoming, self-relevant events before they happen”? That is to prepare for trading we have to engage the Default Network. That engagement will not happen when we are focused on a complicated task requiring intense attention to something beyond ourselves. That is mental preparation for trading requires a period of tranquility, and a lack of external stimulus from the world outside. Specifically, and almost counter-intuitively, for best rehearsing hypothetical market action and its impacts on positions/a portfolio means leaving screens and position reports out of sight. So maybe the Phantom of the Pits did know something.
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*Phantom of the Pits first appeared in Futures Magazine Traders Forum, and his collected wisdom as “Phantom’s Gift” on the same website, www.futuresmag.com.