Editor’s note: This is the second of a two-part Perspectives series on the principles of “mindful” trading. Read the first.
Professional athletes often expound during post-game media sessions about being “in the zone.” It’s a parallel universe where all goes quiet, time seems to stand still, and their ultimate triumphs are almost effortless.
A similar feeling can arise when trading, according to Gary Dayton, an author and clinical psychologist. The practice of mindfulness—a focus on the here and now—is a precursor to that state, and it can help traders focus on their performance rather than getting entangled in their internal emotions.
“The big problem in trading is that we focus on thoughts or feelings to the detriment of our trade,” says Dayton, whose book, Trade Mindfully: Achieve Your Optimum Trading Performance with Mindfulness and Cutting-Edge Psychology, was published in December. “We are trading our emotions and our thoughts rather than trading the trade.”
For traders, “mindfulness allows us not to buy into what the mind is telling us,” Dayton said. “Your mind becomes very clear. You can say, ‘I just had three losses, but the base rate shows this is a good trade and it meets all my criteria, so I'm going to take that trade.’”
Recent research appears to back up the notion that mindfulness has an actual human impact. In a 2013 study, University of Wisconsin-Madison neuroscientist Richard J. Davidson found that after eight hours of mindfulness “practice,” a group of meditators showed “a range of genetic and molecular differences,” which ultimately correlated with faster physical recovery from stressful situations.
How can traders incorporate these concepts into their own approach to the markets? Let’s let Dayton walk us through:
Step 1. Perform a “mindful practice” on a routine basis every day. Start with five minutes a day and gradually ramp it up to 30 minutes, “which we know from science is the amount of time that positively impacts the brain structure in areas that are important to trading,” Dayton said. Sit in a chair where you won't be disturbed and think about your breathing. “Notice the sensation of your breath coming in and out,” Dayton said. “See how long you can stay focused on that before your mind wanders off.”
Step 2. Incorporate the mindfulness from Step 1 into your trading activities. Say you study your charts at night, but often find your mind is wandering or you’re surfing the Internet. Take note of these instances “and bring your attention back to studying your chart,” he said.
Step 3. Use mindfulness to address specific issues in your trading, such as cutting profitable positions off too soon. For example, if you’ve previously locked in gains of 1.5 points on a position, see if you can get to 2.5 points. Doing so might make you uncomfortable, “but the objective is to notice that those are just thoughts and feelings that come and go. This will increase your clarity,” Dayton said. “You will be able to focus on how the trade is really doing and choose the action that is right for you.”
As science advances, we’re learning more and more about how using our noggins the right way can yield benefits, in trading and everything else (You could even try some free brain and cognitive sciences courses from the Massachusetts Institute of Technology).
"Change the brain, change the mind, so we are more focused on what matters to us,” Dayton concluded. “But it comes through practice.”
In other words, breathe in … breathe out …