Tools and Techniques to Develop the Mental Edge

The Authentic Key To Trading Psychology: Mindfulness

You have probably heard about mindfulness.  It’s a mental skill that is of particular value to traders.

Over last decade, science is showing mindfulness to be beneficial to both physical well-being and mental health.  The practice of mindfulness reduces anxiety and stress, slows heart rate, lowers blood pressure, and improves immunity functioning.  It also improves concentration, heightens self-awareness, and promotes a clearer understanding of our environment by helping us to step back from the constant mental and emotional chatter that interprets the events occurring around us so that we see those events more objectively. 

Mindfulness Used in Sports, the Fortune 500 and the US Military

Mindfulness isn’t some fuzzy, new age trend.  The Seattle Seahawks routinely use mindfulness to focus before practices and games, and Phil Jackson teaches his basketball teams mindfulness, noting it is part of the sauce that has brought him eleven NBA titles.

The corporate world has also embraced mindfulness.  Google, Target, General Mills, and Aetna (among others) all have brought mindfulness into their everyday workplace.  Even Wall Street firms like Goldman Sachs, BlackRock and Bank America have adopted mindfulness to aid in lowering employees stress and improving decision-making.

Aetna has tracked the results of the mindfulness programs it offers its 50,000 employees: Stress has reduced by 28%, sleep quality has improved by 20%, and productivity has increased by 62 minutes per week—pretty impressive results.  Employee demand for Aetna’s program is high with every class overbooked.

Even the US Military has become interested in mindfulness.  A study of soldiers about to deploy to the Middle East were trained in a mindfulness exercise designed to be used in real-time, highly stressful military situations.  Results were positive, showing lower overall stress, better adaptation, concentration and focus in stressful situations, and a quicker bounce back to normal after experiencing high stress challenges.  Soldiers who didn’t get the mindfulness training were requesting it at the end of the study.  

What is Mindfulness?

So what is mindfulness?   Mindfulness is a mental skill that fosters a state of active, open attention on the present moment.  You observe thoughts and feelings as if you were a coach watching your best player (that’s you), observing their performance without judging them as good or bad, but noting where they could do better.  Mindfulness is all about being really awake in the present moment, instead of living life through memories of past events or projecting into the future.  Research shows that no matter what task we are doing; our mind is only on that task about half the time.  Mindfulness helps us focus our randomly wandering mind.


Mindfulness and Trading

Mindfulness is readily adaptable to trading.  Like the athletes, corporate employees and soldiers, traders who practice mindfulness find their minds to be more clear and present-minded.  They notice that they are better able to read the market when practicing mindfulness, less prone to making rash decisions, and less prone to committing cognitive biases.  They also find mindfulness invaluable in overcoming unskillful trading in response to difficult emotions such as fear, greed, and anger that impair their performance.

Mindfulness Conquers Loss Aversion

One of the biggest psychological obstacles to successful trading is our natural tendency towards loss aversion.  Losses significantly affect us and can cause a variety of unskilled trading behavior.  Loss aversion is often behind cutting profitable trades short, hesitating to take sound trade setups, not placing and moving stops, holding onto losing trades, adding to losing positions, and doubling up on position size to make up for earlier losses.  Mindfulness is a strong antidote to loss aversion.

Research shows that the brain’s fear center—the amygdala—becomes active when under the throes of loss aversion.  Researchers have observed this brain area light up when study participants were in trading situations and loss aversion was triggered.  Other research has shown that the amygdala shrinks in size and it’s functioning attenuate after a brief period of mindfulness practice.  This helps to explain why mindfulness is so effective in tackling fear, anxiety and stress and why it has become the cornerstone treatment in clinical programs that address these issues.

If there is one key mental skill traders ought to develop, it’s mindfulness.  Fortunately, it’s easy to learn.  There are many resources available.  The author’s website has information on trading and mindfulness (click this link), and his book, Trade Mindfully—a Wiley Trading Series publication, shows traders how to apply mindfulness to their trading.