The effect of habits on trade

How are habits formed? What should we do for a successful trading and investment life? How can we change our current negative habits related to investing and trading? In this series of articles, we will discuss habits and their effects on our lives at the request of one of our readers.

Habits are behaviors that have been repeated countless times and have become automatic over time. When learning a behavior, the amount of neural activation in the brain is quite high at first. A lot of information enters all at once, and the brain tries to process each piece of information, pay attention to every detail, and analyze each situation carefully. It investigates what the most effective action plan is that requires the least energy and effort. This is quite important because, in primitive times, accessing food and therefore energy was very difficult, and at this point, using the existing energy in the most effective way was vital. In this way, the brain creates space in mental capacity so that you can direct your attention to other tasks by expending less energy and reducing cognitive load.

The paths paved by repeated behaviors

Some feedback mechanisms are effective in the formation of habits. First of all, the process of forming habits begins with trial and error. A person first tries a behavior, and if it is successful, he begins to repeat it. If it fails, it learns a different method and repeats it in a different way, and if it works, it starts repeating the new behavior. The repetition of a behavior ensures that the same region in the brain is constantly stimulated and that region develops further. You can think of it just like the muscles that develop with weight training, the more you work, the more your muscles in that area develop. On the other hand, whenever you stop training, it starts to decline at that point. As they are repeated, the behaviors that do not work are erased, while the actions that work are reinforced. Thus, they become mental shortcuts that are reinforced as they are experienced.

Another feedback loop is created by dopamine. Many behaviors that involve habits, such as playing games and consuming junk food, are associated with higher dopamine levels. Moreover, dopamine is released not only when you perform these actions and feel pleasure but also when you anticipate pleasure. As your dopamine levels rise, your motivation to take action also increases.

The Catalyst of Trading Addiction: Dopamine

At this point, I would like to open a parenthesis and talk about some of the harms of the dopamine-driven feedback loop in terms of financial markets. Firstly, I believe one of the reasons many traders become addicted to trading is this. Performing an action solely focused on dopamine leads to addiction and a constant desire for more. You want more because after a while, your satisfaction threshold starts to rise. Initially, while you opened and closed a few trades, this situation begins to become your new normal, and opening a few trades no longer feels as satisfying as before. At this point, the solution becomes taking more trades or increasing your risk appetite (You can look at the concept of hedonic adaptation for a more detailed reading).

While conditioned to win…

I also mentioned that just thinking and expectations can lead a person to release dopamine. If you think that no one enters a transaction with the expectation of "I will lose," you may notice that the process begins to activate before entering the transaction. A person becomes so conditioned to winning that they can even overlook the irrational aspects of the transaction they are about to take. At the same time, since you do not know when you will win or lose, you tend to repeat the behavior continuously. You can see a similar logic in slot machines. A person keeps spinning the slots but has no information about when the reward will come. They believe that as the frequency of the behavior increases, the rate of reaching the reward will similarly increase. However, the rewards come randomly, which leads the person to think, "Why shouldn’t the next one be a win?"

One way to reach your elevated dopamine levels is the amount of money being traded. By increasing your risk amount and the balance you trade with, you try to achieve more profits. If your risky actions yield positive results, your dopamine level will rise significantly, leading to habitual behavior and feeding the dopamine-focused feedback mechanism. I would also like to share a famous saying related to this: "The gambler's most unfortunate day is the day they achieve their first win. Because this makes a person addicted for eternity."

Life has just begun for the winner

In the cryptocurrency sector, we often hear similar examples. For the losing person, hope fades after a while, and they may think they have failed and give up; however, for the winner, life has just begun. They believe they have solved the system and trust that they will win in their next attempt, continuing to make trades. Even if they lose after their first profitable trade, their belief that they will win next time remains.

Under normal circumstances, I mentioned that actions that do not work are eliminated as they are repeated at the beginning of the text, while actions that do work are reinforced. I think that individuals, when trading, become caught in a pattern of bad habits like gambling because they focus too much on profit ( rewards and dopamine ). Of course, we all want to win, but we should ask ourselves whether that should be the sole purpose (. I exclude people who manage risks and adhere to rules and principles from this list.

In the world of trading and investment, what we need to do is to not only increase the number of good habits such as managing psychology, entering trades with confirmations, and controlling risk appetite, but also to reduce the number of bad habits like increasing risk and the amount invested as we gain, entering trades without being sure, and taking trades without stops. In our next article, we will discuss some habits you should maintain in financial markets, how you can restructure your existing habits, and why these are important.

This article does not contain investment advice or recommendations. Every investment and trading action carries risk, and readers should conduct their own research when making decisions.