AT THE CLOSE Practice Mindfulness To Increase Your Profits
by Eliot Brenner, PhD
Emotionally intelligent people know that sometimes it is a good idea to act on your thoughts and feelings, and sometimes it is not. When your mother-in-law offends you, emotionally intelligent people know it is probably best to smile and let go of your angry thoughts and feelings. On the other hand, when you are walking past a dark alley and someone lunges at you, it is probably a good idea to fight or run away. Trading is no different. There are times when it is important to act on your thoughts and feelings, and times when it pays to let them go.
Mindfulness is a form of Eastern meditation that involves becoming more aware of your thoughts, feelings, and physical sensations and learning to take a neutral, more accepting stance toward them. Over the past 10 years, Eastern philosophy and the practice of mindfulness have entered the Western mainstream of medicine and psychology. For example, psychological research has shown that people who struggle with emotional pain such as anxiety and depression often get better when they become more mindful. Although most traders do not suffer from clinical depression or anxiety, they can still use mindfulness to increase their profits, sense of well-being, and job satisfaction.TWO SELVES, ONE MARKET
Mindfulness has two components. The first is learning to pay attention to what you are experiencing in the present. The second is adopting a stance of openness and acceptance to this experience. Successful traders need to be completely present and observe with openness the movement of the markets. On the trading floor, this involves attending to order flow, economic numbers, the emotional reactions of individual traders, and the overall mood of the floor traders.
Of course, you cannot be attuned to what is happening on the floor (outside of yourself) unless you are fully aware of what is happening inside yourself -- your thoughts, feelings, and physical sensations. Learning to be in the moment -- aware of your thoughts and feelings without necessarily acting on them -- is a skill that traders can learn.
Many practitioners of mindfulness believe that people have two selves. The first is the "conceptualized self," which is the summary of all your self-evaluations. Some of your self-evaluations might be "I am an anxious trader" or "I am a trader who takes profits too early." If you become attached to these kinds of thoughts and feelings, the conceptualized self can compromise your trading.
The second is the "observer self," in which the self is aware of experiences in the moment. This self views thoughts and feelings not as unchanging beliefs about who you are, but as aspects of your internal experience to observe and accept without judgment. Instead of having the self-evaluation "I am an anxious trader," the observer self would note, "I am thinking I am an anxious trader." Likewise, the thought "I am a trader who takes profits too early" would be experienced as "I am thinking I am a trader who takes profits too early."
Distinguishing between believing you are an anxious trader and having a thought that you are one is a critical difference between the "conceptualized self" and the "observer self." Understanding and cultivating the ability to make this distinction is a key component of mindfulness.MENTAL TRAPS, MINDFUL SOLUTIONS
One of the most important distinctions between mindful approaches to mental health and most traditional psychological approaches is that traditional approaches focus on helping people control or manage their psychological pain, whereas mindful approaches help people learn to accept their pain. Traditional approaches to psychological problems often teach people how to dispute their negative thoughts and how to practice techniques such as muscle relaxation to reduce emotional pain. In contrast, mindfulness-based approaches teach people to accept and learn to live with all of their thoughts, including the negative ones.
Meditation is viewed not as a way to control emotional pain, but as a way to accept it. Meditation and other mindfulness techniques help people live with all of their thoughts and feelings, including the painful ones, so they can do the things in their lives that matter most to them. There are a number of ways in which traders become trapped by their own thoughts and feelings. Mindfulness offers unique ways to escape such traps.TRAP #1: CONTROL
In the Tao te Ching, the Chinese "Book of the Way," author Lao-Tzu says:
If you realize that all things changeOther than your behavior, there is very little over which you have control. Successful traders know they have virtually no control over the direction of the markets. They can only control how they behave with respect to the markets, buying when the market goes up, selling short when the market goes down, or not trading. Throughout the trading day, traders have thousands of thoughts. Because they cannot control the content of their thoughts and feelings, great traders develop their observer selves so they can learn to accept these thoughts and feelings. Acting on negative self-evaluating thoughts like those noted earlier can have dire financial consequences.
There is nothing you will try to hold on to
Trying to control the future
Is like trying to take the master carpenter's place
When you handle the master carpenter's tools
Chances are you will cut your hand.
Meditation is one way to cultivate the observer self. Mindfulness meditation classes and workshops are a good way to begin this process. For those who like to learn independently, there are also books and audio materials. Meditating before the market is open is a great way to place yourself in an accepting posture before you place a trade.TRAP #2: AVOIDANCE
Avoidance involves getting away from or not doing something that causes unpleasant thoughts and feelings. Some of the most potentially harmful kinds of avoidance include substance abuse or overeating. Less deleterious kinds of avoidance include daydreaming or watching television.
For traders, avoidance can have serious psychological and financial implications. Take for example a trader who avoids going to work because he does not want to face covering a losing short position. Not only might this trader incur margin calls and serious financial losses when he does trade, but the psychological implications of a serious setback could cause him to lose the confidence to trade again.
Some traders avoid facing fears that prevent them from increasing their trading profits. Traders sometimes avoid increasing the size of positions because they fear incurring losses that might compromise their sense of self-worth. Their fears manifest as thoughts like, "I would like to increase my position size, but I'm scared that I'll lose money, which would mean I am a failure. So I better not take this trade." In this situation, such thoughts ("I will lose money, I am a failure") are attached to or "fused" with a single action (increasing size) and become the reason for avoiding or not taking a trade.
A mindful approach to habits like this one is to decouple or defuse the association between thoughts or feelings and action. One way to do this is to substitute the word "but" for "and." Instead of "I want to trade, but I am scared," you can say, "I want to trade and I am scared." This acknowledges your inner fear, but also divorces the fear from the act of trading. It is difficult to control your thoughts and feelings, but you can use language to alter the ways in which thoughts and feelings influence your behavior.
Another mindful way to overcome avoidance is through exposure, which is a fancy term for getting back on the horse after you have fallen off. The best way to overcome the fear of assuming larger position sizes is to gradually increase the size of your trades. For traders struggling with losses, the best way to overcome anxiety and self-doubt is not to stop trading, but to ratchet down your position size until you achieve profitability.MARKETS AND METAPHORS
Another way to defuse the association between thoughts or feelings and action is through metaphor. One mistake that some traders make is to act impulsively, jumping into the market because they are afraid they will miss out on great opportunities. Mindful traders know that the market rewards patience. An appropriate metaphor for the market is that it is like a river, constantly flowing and offering opportunities. If you view trading as sitting by a river waiting for the best opportunities to float by, you are much less likely to trade impulsively.
Some traders regard their existence as a battle between opposing thoughts and feelings. The impulsive trader wages an internal battle to keep from trading too much, while the fearful trader battles to gather the courage to trade at all. In addition to shaping your internal experience by using your observer self to let your thoughts come and go, you can also use metaphor to shape your internal experience.
Instead of alternatively taking sides in an inner conflict -- like black and white chess pieces battling -- a more mindful approach is to assume the perspective of the chess board, an impartial observer who sees the benefit of both sides and weighs each before acting. Battling opposing forces within yourself takes energy and distracts you from observing the market context that can help you achieve greater profitability.ACCEPTANCE AND FORGIVENESS
Excellence in any profession is a process, not an outcome. Great athletes strive to improve their performance. Trading is no different. You are not perfect, and you never will be. What you describe as "trading mistakes" might be more compassionately conceptualized as learning experiences. As Mark Douglas says in The Disciplined Trader, "Always keep in mind that each moment is a perfect reflection of your level of development. ÉWhen you start trading from the perspective that mistakes don't exist, you will be amazed at the sense of freedom you will feel..."
Becoming a mindful trader involves accepting your imperfections, doubts, and uncertainties and forgiving yourself when you execute poorly or deviate from your trading plan. If you are inclined to beat yourself up when you make a mistake, ask yourself, "Is punishing myself in this way helping me to become a better trader?"INTEGRATING MINDFULNESS
Trading is a stressful enterprise that takes concentration and effort. The need to attend to some thoughts and feelings while letting go of others makes mindfulness a valuable tool for achieving trading excellence. Alongside a sound trading plan, mindfulness will help you increase your trading profits, improve your job satisfaction, and enhance your sense of well-being.
Eliot Brenner is a licensed clinical psychologist. He has a private practice in Fairfield, CT, where he counsels and coaches traders. Brenner has published articles on trading psychology and emotional intelligence in financial publications and psychology journals. He can be reached at eliot.brenner@sbcglobal.net.
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Originally published in the November 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.