Home > Creativity, management, Markets, trading > Profitable ETF Trading Strategies: understanding the evolutionary brain

Profitable ETF Trading Strategies: understanding the evolutionary brain


Sociobiologists describe the formative years in the development of the human brain as the era of evolutionary adaptation. This was a period of hundreds of thousands and even millions of years in which the law of natural selection shaped and molded our brains into the marvelous workings of the adaptation that we now enjoy. 

Unfortunately for traders, however, many of the behaviors and tendencies that are hardwired into our brains do not translate directly into success in the marketplace. Indeed, many evolutionary adaptations are directly opposed to our ability to routinely make money in the market. 

It is very clear to me that 10 million years of evolution cannot be set aside through the simple application of catchy phrases and clever slogans. It takes long and sustained effort to begin to offset the power of evolution. 

Here is an example of the kinds of problems your evolutionary brain will provide. It helps explain why it is so reliable to go against the crowd if you want to make money. 

The evolutionary brain has been conditioned from an environment of scarcity. In our hunting and gathering days, it would have been a significant disadvantage to have missed an opportunity to catch a rabbit or kill a mammoth. There is a distinct advantage to being successful in each and every trade when you cannot be sure that another trade will soon come along. 

The extra energy that comes from being afraid of missing the trade would have been helpful in our hunting and gathering days, but in modern markets being driven by emotions will get you killed. 

When we look at the equity market as an environment of abundance, filled with infinite opportunities, we can see that it is an advantage to be able to let marginal trades go on without you. It is the panic reaction of scarcity that makes you want to chase a trait that has already department your entry zone. Chasing false breakouts is one of the most reliable ways of losing your money, yet be emotionally satisfying behavior is compelling to our evolutionary brain. 

How can a trader understand and then overcome these kinds of handicaps? 

For some traders the only answer is to be strictly mechanical and to program your trading behaviors into software to execute porting to the rules and nothing but the rules. Having your trades executed by a broker or an auto-broker fall into this category as well. 

Discretionary traders or semi-discretionary traders must find other ways to accommodate their natural tendencies to chase every idea they see. Attention to detail, preparation, self-discipline, a trading mastermind, periodic reflection and after action reviews all will help you  develop the self-discipline you need to survive and succeed in the market. 

Don’t underestimate the power of the evolutionary brain.

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  1. May 1, 2009 at 2:20 pm

    Hello,
    Thanks for article. Everytime like to read you.

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