Whether you’ve ridden the roller coaster of the past few weeks for profit, been bashed and bruised by the volatility, or sat on the sidelines and waited, this has been an intensely emotional time for traders and investors everywhere. Here is some practical trading advice for getting yourself into the best mental and emotional state for maximizing the opportunities of the coming weeks.
First here’s a reminder of the bottom-line on mental/emotional dynamics that every trader needs to know: As human beings our brains are hard wired to block information to protect us from emotional pain. If we are experiencing stress, anxiety, and other forms of upset, our brains begin to shut down awareness. We begin to experience what experts call perceptual blindness – unable to see what is staring us in the face – causing us to make poor trading decisions, and lose money.
In other words, our brains are not naturally designed for successful trading. As traders we must have a mental methodology, a system of thinking (in addition to our trading system/methods) to counteract our inherent mental processing. If you don’t, there is a very high likelihood that you will be defeated not by the market, but by your own brain!
Here are some of the most effective methods highlighted by leaders in the field such as Mark Douglas and Brett Steenbarger.
In his two trading books, the The Disciplined Trader and Trading in the Zone, Mark Douglas outlines a series of key mental strategies that take the fear and stress out of trading, and allow you to develop the relaxed state of awareness in which you can take full advantage of the opportunities that the market is presenting:
1) Risk Acceptance
When you know in advance how much you stand to lose if your edge doesn’t pan out in a particular trade; when you fully accept the possibility that you may lose that amount as part of the ratio of wins to losses in trading your methodology – then there is nothing that can hurt you, or cause you any psychological pain.
We’ve been taught that you can be successful if you have a positive mental attitude. And that’s true. But many traders make the mistake of believing that having a positive attitude means always thinking about winning. Thinking about losing is bad, defeatist, so they avoid thinking about losing. Successful traders however, think in terms of probabilities. They know that there will be wins and losses. They have learned how to think about their losses and about risk. Its in the acceptance of risk, not the avoidance, that they maintain a healthy and positive mind.
The fear and stress that many traders feel particularly at times like this, is caused by the fact that they aren’t comfortable with the fact that they may lose. The fear you may feel is actually your mind and body struggling to ignore reality; ignore the part of you that knows damn well that you will lose because its an inevitable part of trading. Because many traders don’t accept the risk ahead of placing a trade they experience the pain of loss – not because of the actual money gone from their account, but because they are suddenly confronted with a reality that they have been avoiding. They didn’t confront the possibility that they might lose.
Here are some strategies that I use to help me accept the risk of each trade:
While I’m preparing for a trade and evaluating where to place my stop, I ask myself “How much am I willing to spend to find out if my trading method, my edge, will work for this trade?”. Another variant on this question which helps avoid over trading is “Am I willing to spend (whatever your stop loss will be) to find out if my edge will work for this trade?”.
This simple approach causes you to think very carefully about the expectancy of your method and the state of the market. It will help you to get clear about whether your method does have an edge in this kind of volatile market. Or it may prompt you to stay on the sidelines and preserve capital.
The idea is that before you get into a trade you have quantified how much you can lose and you really are willing to let go of that money. You know that despite your edge, the market can do whatever it wants and that there is reasonable chance that you may lose. If you choose to enter the trade, mentally you have to accept that your risk money is gone. Its spent. You no longer have the money you are risking.
You have to reach the place inside where that’s OK – so that you can then approach the trade without any fear of losing that money. I like to think of it as though I’m buying a lottery ticket. My risk, my stop, is the money I’ve spent to buy the ticket to find out whether the trade will be profitable. I may win, in which case I get a refund, or I may lose in which case I wont. I’ve really no idea since the market can do anything, but mentally I’ve spent the money to find out.
2) You Don’t Need to be Right to Make Money
You have to do the mental work to let go of the need to know what is going to happen next or the need to be right on each trade. In fact the degree to which you think you know, assume you know, or in any way need to know what is going to happen next, is equal to the degree to which you will fail as a trader. Mark Douglas
The most successful traders have found a way to inoculate themselves from the stress of trading, and from the outcome of their most recent trades. Here’s how they do it:
They have an unshakable belief in the fact that
1) While the outcome of any given trade is uncertain they believe in their edge over a series of trades. In other words they know the expectancy of their method and have confidence that over a series of random outcomes, the odds are in their favor.
2) Anything can happen! In other words they have learned to think of every trade like tossing a coin – they don’t need to know what will happen. They don’t expect to either win or lose.
This firm belief in the uncertainty of any given trade, while knowing that over a series of trades you will be profitable, is very liberating. When you learn the mental discipline of letting go of the result of any individual trade you keep your mind in a state where it can easily perceive the opportunities that the market is offering. It is not distracted by focusing on your expectations of what you think should happen – it can perceive what is most likely to happen.
The Body/Mind Connection
You can influence your state of mind, your focus, your ability to enter the zone, by being aware of your body – particularly your breathing.
There is a great software program which I use called Emwave which you can run on your computer as you are trading. You attach a sensor either to your earlobe or finger – and it tells you what kind of mental/emotional state you are in by measuring your body’s activity.
With this program you can easily train yourself, through breathing and watching your posture, to stay calm and in the zone even in the most stressful situations. When you are in that calm state you’re most in tune with the market, and most ready to take advantage of the opportunities the market is offering.
I highly recommend that you experiment with seeing the difference in your trading results between days when you use Emwave to trade ‘in the zone’ and when you operate in your normal (probably slightly stressful) state of awareness. Its quite surprising!
As always I recommend that traders learn how to continually clear their emotions using simple clearing techniques so that the build up of emotion, either negative or positive, doesn’t distract you from your focus.
Have a great and safe week ahead!