The Second Week of More Mindful Trading<\/strong><\/a><\/p>\n The Third Week of More Mindful Trading<\/a><\/strong><\/p>\n <\/p>\n To bring new readers up to speed, here is a brief refresher on mindfulness. The topic is all the rage right now because people want to take back control of their attention span and to beat back the numerous distractions that afflict us in everyday life. Mindfulness is about learning to control your attention and your focus, so that you can observe your thoughts and feelings without necessarily acting on them<\/strong>.<\/p>\n For traders and investors, there are several benefits. By being able to direct our attention, we are able to focus more intently on the markets and to block out annoying distractions\u2014like errant phone calls or annoying colleagues. If we are cultivating more focus, then we gain more from our interactions with the market and we can be more effective. Lastly, the tools that we use to control our attention span can assist us in our trading in many ways: resisting urges, managing our emotions and just avoiding bone-headed errors.<\/p>\n When it comes to mindfulness applied to investing and trading, there was a burst of good material last year. Dr. Steenbarger put together a good\u00a0review of the literature on mindfulness<\/a>. There have also been several good books that have come out recently, focused on mindfulness for traders and investors. Two particularly good ones are\u00a0TraderMind<\/em><\/a>\u00a0by Steve Ward\u00a0and\u00a0Trade Mindfully<\/em><\/a>\u00a0by Gary Dayton.\u00a0 Both take the existing literature and best practices on mindfulness and put it into a framework that is useable by investors and traders. These books are excellent roadmaps for anyone who wants to cultivate greater awareness and detachment in their trading.\u00a0\u00a0I liked the material so much that I incorporated some of it into my own book, Peak Performance Trading and Investing<\/em><\/a>. I liked the most Steve Ward\u2019s definition of mindfulness in a markets context: \u201ctrading in the moment, paying attention to what the market is doing right now and the environment around you, being aware of your own thoughts, emotions, physical sensations and any impulses or tendencies to act\u201d.<\/strong><\/p>\n I am a friend of Steve Ward and a big fan of his work.\u00a0His recent book TraderMind<\/em>\u00a0<\/a>featured an 8-week program on boosting mindfulness for traders. The goal is to make you a much calmer, more aware trader by the end of the eight weeks, no matter what your starting point is. The 8 weeks start with a self-inventory, where you evaluate your current level of mindfulness. You then re-evaluate your mindfulness level every week. From there, you undertake a series of exercises designed to boost your awareness and mindfulness with regards to yourself and the markets.<\/p>\n On the 15 question mindfulness survey, each question is on a scale of 1-6, with a higher score indicating more mindfulness. The maximum possible score is 90 (15 * 6). My first week score was 45, which means that I am somewhat aware but running on autopilot far too often. Here is my track record of scores:<\/p>\n Week 1 mindfulness score: 45<\/p>\n Week 2 mindfulness score: 45<\/p>\n Week 3 mindfulness score: 48<\/p>\n Week 4 mindfulness score: 50<\/p>\n This week\u2019s program, Week 4, is entitled \u201cManaging Urges and Impulses\u201d<\/strong>. These can sabotage our performance in many ways, so we need to learn to manage them. Many successful investors and traders credit a great deal of their success to their control of their urges and emotions. Steve Ward cites a Warren Buffett quote about success in the markets: \u201cOnce you have ordinary intelligence, what you need is the temperance to control the urges that get other people into trouble in investing\u201d.\u00a0 While you need intelligence to learn the basics of the markets, you won\u2019t achieve great success until you have learned to master yourself\u2014meaning your emotions, state, etc.<\/p>\n When we get in trouble in the markets, it\u2019s often because we don\u2019t or can\u2019t resist our urges. For instance, if we have a position going against us, we can get fearful and have the urge to close the position\u2014fixing a loss, even if it wasn\u2019t the right decision to make. In a similar vein, many people suffer from the Fear of Missing Out (FOMO), which is an urge to jump into a position. That can lead us to get into positions that are impulsive or without enough consideration, leading to subpar positions and subpar profits.<\/p>\n Obviously, we want the means to resist our worst urges and to continue to make rational and profitable decisions in the markets<\/strong>. The first thing to note is that it is not wrong to have certain urges or temptations that are harmful to our trading. They will always be arising in some way or another. In fact, we will always have the proverbial little devil on our shoulder, whispering evil thoughts in our ear. The problem comes when we act on these urges and make a dumb mistake. Mindfulness is about learning to control and redirect our attention and our thoughts so that we can avoid acting on unhelpful urges and temptations. Our goal is to put a circuit breaker between our urges and impulses and our reaction to them, so that we can consciously choose our reaction. We control our urges instead of our urges controlling us. <\/strong><\/p>\n This week teaches us to manage our thoughts. The homework consists of:<\/p>\n The first exercise is entitled \u201cReflecting on Your Trading Urges\u201d. I will share some of my answers to the questions to give you an example of how you are supposed to complete the exercises.<\/p>\n \u00a0<\/em><\/p>\n The one that I feel the most strongly and have had the most trouble with is FOMO. My strategy has a small momentum component, because I am trying to buy the right stocks at the right time. Typically, I devote most of my time to researching companies and figuring out where there can be potentially be a rerating story. But I will only get into a position when there is some positive price momentum. Sometimes there will be a stock that I\u2019ve started to research and either I\u2019ve passed on (because it\u2019s not interesting) or I have yet to finish the research, and then the stock will start to move. Typically I get the strong urge that I am missing out on a big move and I need to act right now to put on the position before it has a big move, with all of the accompanying urgency. Thus, I\u2019ll feel an urge to act right now, even if the position doesn\u2019t make much sense.<\/p>\n The other urge or temptation that I face often is the urge to do something in the market in order to combat boredom. If the markets are calm and I don\u2019t see many opportunities, then I\u2019ll find myself bored\u2014and susceptible to the urge to act, just for the sake of staying active in the market. When I first started working in the markets I had an amazing mentor<\/a> whose favorite line was \u201cwhen there\u2019s nothing to do, do nothing\u201d\u2014immortal advice<\/strong>. This training has made me less susceptible to this urge over time, but nonetheless it can still strike.<\/p>\n <\/p>\n <\/p>\n As I mentioned, the first urge usually arises when I see the start of price momentum in a stock that I\u2019d been following. For instance, if I had been looking at a stock and on the fence about buying it, and then it broke out of a 6-month base and went up 7% in a day, then I would be tempted to chase it higher. I would tell myself that this was the start of an even bigger trend. It\u2019s more that I would feel remiss for missing out on such a big move and tell myself that it was \u201cobviously\u201d primed for a big move and that I \u201cshould have known\u201d.<\/p>\n In terms of the urge to do something, it usually arises if I\u2019ve spent a period of several weeks looking at the markets but haven\u2019t opened or closed any positions. Usually, I would start to wonder if I\u2019m missing something in the names that I\u2019m researching or I was looking in the wrong places. After all, the fact that I\u2019ve spent so much time without putting on a position would indicate that I had missed something or was looking too hard. Again, this urge feels like a little whispering in my ear, egging me to do something, even if there\u2019s nothing to do.<\/p>\n \u00a0<\/em><\/p>\n In the past, I would unfortunately act on FOMO. When I was first involved in the markets, I would chase, chase and then chase some more. I was constantly getting into marginal positions because I was afraid of missing out. Needless to say, this was damaging to my results.<\/p>\n The story is different now. With both urges, or almost any urge in the market, I try to respond by refocusing on my process. As I write about extensively in my book Peak Performance Trading and Investing<\/a><\/em>, I am a huge proponent of sticking religiously to a process in order to stay consistent and to avoid falling into any number of potential traps. Whenever I get the urge, I remind myself of my \u201cchecklist\u201d \u2013 the document that I use to make investment decisions. Usually, just the act of paying attention to it for some time will get me back on track, as I remind myself of what I actually<\/em> need to do before putting on or taking off a position\u2014instead of thinking about what I want to do.<\/p>\n \u00a0<\/em><\/p>\n The consequences in the past were dumb positions which led to poor results. I used to act directly on my urge to \u201cdo something\u201d or not to miss out, so I would put on many impulsive positions. They were usually not well thought out, so they quickly became frustrating and usually lost me money. A side effect was that the position sizes were usually too big because I hadn\u2019t followed my normal risk management procedures. I was so anxious to \u201cmake money\u201d that I would put on a large amount of risk because I was hoping to make more money, more quickly. Instead, the larger position sizes would cause even more damage.<\/p>\n Now, the consequences are more helpful. Almost every time, slowing down and doing a thorough exploration of my checklist will help me to stay centered and avoid disaster. Very rarely, that urge will actually alert me to a good trade\u2014but it still has to be vetted like any normal position would be.<\/p>\n <\/p>\n <\/p>\n This week\u2019s practice included an exercise where you had to do a normal relaxation session and then pay attention to you urges\u2014but not to do anything. I have a bad back, so I often noticed some pain or discomfort in my back and had the urge to shift around. But instead of acting that urge, I had to learn to live with it for a few minutes. At first, it was very strange and uncomfortable to be in pain and not be able to lessen it. It took a while for me to learn to tolerate the discomfort and to successfully resist the urge. But after some time, I was able to do it. Strangely enough, once I had some practice, the overall level of discomfort seemed to lessen. Once I had acknowledged the feeling but not acted on it, the feeling seemed to dissipate.\u00a0 This was definitely the opposite of what I expected.<\/p>\n It\u2019s important to become aware and detached from your urges and impulses. This allows you to treat them more as information and less as commands to be followed. The key is how you handle the urges in the future. Steve Ward teaches a technique called \u201curge surfing\u201d, where the urge itself is a wave; and your goal is to surf the wave back to shore. This means resisting the temptation to do something destructive and instead living to fight another day. We successfully urge surf by becoming mindful of our impulses and treating them as information. We are not judging them, nor are we acting on them. Instead, we are gently guiding ourselves to the most productive state possible. When a thought helps, we embrace it. If it\u2019s just a random or an unhelpful urge, then we try to tame the wave. One way is to verbalize the urge\u2014where you acknowledge the urge to \u201chold a trade until it gets back to even\u201d or to \u201ctake the pain on the short position\u201d. This will help you to widen the difference between you and the thought itself.<\/p>\n The benefit of mindfulness is learning to be calm, collected and in control of our emotions<\/strong>. This helps us to make better decisions and to avoid dumb, spur-of-the-moment decisions. It is these subpar decisions that can hurt us and prevent us from reaching the heights of profitability that we shoot for.<\/p>\n Sometimes, traders and investors have trouble with too much calm<\/strong>. They associate a lack of activity with boredom\u2014and then they get tempted to put on marginal positions just to stay engaged in the market, even if they\u2019re not worthwhile. But as Steve Ward writes, \u201cBoredom itself is not the challenge, it is a feeling that you get; it is what you do behaviorally when you have that feeling that really matters\u201d. The key is to take the right decision and pursue the right behavior<\/a>, even if that means doing nothing in the markets. Mindfulness should help you to stay resourceful and making the best decisions in the market, no matter what.<\/p>\n I\u2019ve written earlier about the mindfulness practices from Weeks 1 through 3, so I won\u2019t go into much more detail on these. The only thing I say is that familiarity breeds comfort. The first time through, some of the exercises felt almost alien. Now they feel more comfortable and I get more out of them. Practice makes perfect.<\/p>\n One of the exercises in this week\u2019s list seemed out of place: taking a peaceful, mindful walk for 15 minutes. I like going for walks in my neighborhood, which is a beautiful, green and peaceful part of London. But when having to do this exercise, I realized how non-mindful my earlier walks were in the past. I would either be listening to music, talking on the phone, chatting with someone, or absorbed in thought. Previously, I wasn\u2019t truly experiencing or immersing myself in the walk. This time, it was nice to fully switch off my brain\u2019s other activities and just to take a walk where I could completely enjoy myself and drink up the sensory experience. Taking a completely mindful walk is hard at first\u2014engaging all of your attention can feel like sensory overload. But once you get the full experience of nature, it\u2019s hard to go back to the old, harried and distracted way that you used to go for a stroll.<\/p>\n Overall, I can see improvements from the mindfulness training. In the time that I\u2019ve been practicing it, I have become more attentive, more focused and less ADD. With my investing, I feel like I have more focus. I have seen a bit of progress in improving my decision-making skills, as I am able to cope better with emotions and urges. But it will take me a few more weeks until I am able to be completely detached from my emotions and I am a skilled \u201curge surfer\u201d. Nonetheless, I feel that I am getting better.<\/p>\n I have another four weeks left of Steve Ward\u2019s Mindfulness Program. I hope that you watch this space and do the exercises along with me. Let\u2019s hope that our mindfulness improves together.<\/p>\n No relevant positions<\/em><\/p>\n \u00a0<\/em><\/p>\n By Bruce Bower | E-mail: Bruce [at] howoftrading.com<\/p>\n Blog:\u00a0www.howoftrading.com<\/a>\u00a0| Twitter: @HowOfTrading\n
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