Note: This post is a direct follow-up to our deep dive into Managing Adrenaline in Trading. While adrenaline governs the immediate “rush” of a trade, today we explore the long-term hormonal shifts that dictate your career’s longevity.

The Biology of Risk Taking

The Science of the “Hour Between Dog and Wolf”

In the world of professional trading, success is almost always framed as a battle of wits, charts, and mathematical edges. However, groundbreaking research by neuroscientist and former floor trader John Coates suggests that the true battleground is the human endocrine system. In his seminal book, The Hour Between Dog and Wolf, Coates identifies a physiological metamorphosis that occurs within every trader. He calls this the “Hour Between Dog and Wolf”—the precarious moment when a disciplined, rational trader (the dog) is chemically transformed into a reckless, overconfident predator (the wolf).

This transition is not a failure of character or a lack of “mental toughness.” Instead, it is a fundamental shift in The Biology of Risk Taking. Our bodies are not passive observers of market data; they are anticipatory machines that react to risk with a flood of hormones. When these hormones—specifically testosterone and cortisol—surge beyond their optimal levels, they physically rewire your brain’s ability to assess probability. This post provides a comprehensive deep dive into the biological mechanics of the trade and how you can manage your chemistry to maintain a professional edge.

The Winner Effect: Testosterone and the Feedback Loop

The most seductive trap in The Biology of Risk Taking is known as the “Winner Effect.” Coates discovered that when traders have a successful morning, their testosterone levels spike. In the short term, this is a biological advantage. Testosterone increases confidence, sharpens focus, and lowers the perception of risk, allowing a trader to “size up” into a winning streak and capitalize on momentum.

However, a dangerous feedback loop begins when winning streaks persist. As testosterone levels remain chronically elevated, the “Dog” begins to transform into the “Wolf.” The medial prefrontal cortex—the part of the brain that weighs consequences—starts to lose its influence over the amygdala. The trader becomes “irrationally exuberant,” convinced that they are the cause of the market’s movement rather than a participant in it.

In this state of “The Winner Effect,” risk is no longer calculated; it is ignored. The trader begins to over-leverage, ignore stop-losses, and deviate from their tested strategy. The Biology of Risk Taking dictates that your greatest danger isn’t a losing trade; it is the intoxicating chemical high that follows a series of winners. To survive, a professional must implement “Success Resets”—mandatory breaks after significant wins to allow testosterone to return to a baseline “Dog” state.

Cortisol and the Chemistry of the Drawdown

If testosterone is the gas pedal of The Biology of Risk Taking, cortisol is the brake—but it is a brake that often locks up the entire vehicle. Cortisol is the body’s primary stress hormone, released during periods of prolonged uncertainty, high volatility, or a losing streak. Unlike the quick “jolt” of adrenaline, cortisol is a slow-acting, long-lasting chemical that prepares the body for a “defeat” scenario.

When a trader enters a drawdown, cortisol levels rise. This leads to a state of “Hyper-Vigilance,” where the brain begins to see threats even in perfectly valid setups. You become “Risk Averse” to a fault. You hesitate on entries, move stop-losses too close to the current price out of fear, and experience “Analysis Paralysis.”

Under the influence of chronic cortisol, The Biology of Risk Taking shifts from seeking opportunity to seeking safety. Coates noted that in extreme market crashes, traders often enter a state of “Learned Helplessness.” They become so chemically overwhelmed by stress that they physically cannot take action to save their accounts. This is the biological reality of “freezing” under pressure. Understanding this allows you to recognize that your hesitation isn’t “bad trading”—it is a hormonal survival response that requires a physical reset, not just a mental one.

Interoception: The Secret Edge of Elite Traders

One of the most profound discoveries in The Hour Between Dog and Wolf involves the concept of interoception. This is the ability to perceive internal bodily signals, such as the rhythm of your heart, the tension in your gut, or the temperature of your skin. Coates found that the most successful, long-term traders had a significantly higher degree of interoceptive awareness than the average person.

These elite traders weren’t just “guessing” based on a gut feeling; their bodies were reacting to market patterns before their conscious minds could articulate them. Because the body processes information faster than the logical brain, a high degree of interoceptive awareness allows a trader to feel “the shift” in the market.

However, the key to The Biology of Risk Taking is not blindly following these feelings. It is the ability to label them. A professional hears their heart rate increase and thinks, “My body is detecting volatility; let me check my risk parameters.” An amateur feels the same heart rate increase and panics. Mastering your biology means using your body as a high-fidelity data sensor while keeping your “Prefrontal Cortex” in charge of the final decision.

New Insights: The Financial Thermostat and Homeostasis

Beyond the “Dog and Wolf” duality, we must consider the concept of the “Financial Thermostat.” In The Biology of Risk Taking, your nervous system has a “comfort zone” for the amount of money it is willing to win or lose in a single day. When you exceed this comfort zone—even to the upside—your body perceives it as a threat to your social and biological status quo.

If you hit a massive profit target that sits far above your usual daily average, your body may trigger a “Self-Sabotage” response to bring you back to your baseline. This is why many traders follow a “Career Best” day with a “Career Worst” day. Their biology is trying to return to Homeostasis—the state of familiar, safe balance. To break through this, you must consciously expand your “Financial Thermostat” by habituating your nervous system to larger numbers over time.

Practical Protocols for Balancing Your Biology

To manage The Biology of Risk Taking, you must act like a biological athlete. You cannot trade effectively if your hormones are in a state of chaos. Use these three protocols to maintain your edge:

1. The Physical Circuit Breaker

If you realize you are in the “Wolf” state (euphoria) or the “Cortisol” state (paralysis), you must move. Physical exercise is the only way to rapidly metabolize these hormones. A brisk walk or high-intensity exercise signals to the brain that the “threat” is over, allowing your chemistry to reset.

2. Monitoring the Pulse

Successful Biology of Risk Taking requires data. Wear a heart-rate monitor while you trade. If your resting heart rate spikes by 20% while sitting at your desk, you are likely in a state of “Hyper-Arousal.” This is your cue to reduce your position size.

3. The “Pre-Trade” Breathing Baseline

Before clicking “Buy” or “Sell,” perform three “Physiological Sighs” (two quick inhales, one long exhale). This offloads carbon dioxide and lowers your heart rate instantly. By making this mandatory, you ensure you enter the trade from a place of biological neutrality.

Mastering the Animal Within

Trading is often sold as a game of math, but as John Coates demonstrated, it is fundamentally a biological endeavor. The Biology of Risk Taking is the hidden hand that moves the markets. By recognizing the transition from “Dog” to “Wolf,” you gain an edge that no algorithm can match.

To see how these biological principles impact your execution, watch our YT Video on Adrenaline in Trading, here: https://youtu.be/tOoxJLU19w8.