Using Mindfulness to Develop an Edge in Your Trading Psychology

Articles on Trader Psychology by Rande Howell, Trader Psychologist




"I don’t know what happened.  The trade went against me, and I began to fall apart.  I jumped out of the trade early, taking a small profit, only to watch it hit my targets.  This happens a good bit and I really don’t know how to stop it.  Talk is cheap.  I know that I’m supposed to follow my rules -- that “knowing” part seems so easy.  The hard part is doing it.  That’s what is so frustrating.  I know what to do – I just can’t DO it.”   

Mindfulness and Emotional Intelligence – the Cornerstone of a Disciplined and Patient Trading Mind

Read the above vignette again.  What do you notice about it?  It has valuable information about the trader’s problem – if you have the eyes to see it.  Can you observe the mindlessness and the emotional ignorance from which the trader acts?  In his description of this mental and emotional hijacking, he had no clue that he walked into a trap with a predictable outcome.  To him, it came out of left field.  Actually, because of his mindlessness, he was sucked into a habitual emotional vortex that he never saw coming.  Yet all of the important information was right there in front of him.  He just could not see it.  He was mindless of a reoccurring emotional pattern that constantly sabotaged his trading.  And that happens all the time in the trading performances of active investors.

First, notice the limitations of this trader’s emotional vocabulary.  He explains his emotional hijacking by describing behaviors that occurred.  But behaviors are at the tail end of a person’s emotional response to stress.  But that is all he can describe.  He missed the emotion as it triggered, arose, was filtered by his survival instincts, and then took over his thinking.  He was only aware of the resulting behavior after his brain and mind were already hijacked.  This is the classic “tail wagging the dog” story.  And after the event was over, he voiced frustration (an actual emotion) that the pattern kept re-occurring despite his best efforts to stop it.  Because of his limited Emotional Intelligence (EQ), his best efforts (i.e. push harder, don’t give in) continue to set him up for more emotional hijacking that seem to come out of nowhere.

What is he missing, both from an Emotional Intelligence perspective and from a mindfulness perspective? 

First, what is an Emotion Anyway?

They are not pesky, touchy-feeling sensations in your mind.  Emotions are far more complex than that.  Emotions are actually biological action potentials that, by their nature, coordinate activity between the organism (that’s you the trader) and the stressors within an environment (that’s the markets in which you trade).  When a stressor is experienced, an emotional response is automatically set into motion.  This happens in nano-seconds, whereas thinking happens in micro-seconds.  So emotions are already in the bloodstream and the brain long before thinking wakes up to the emotional flood.  Then your survival instincts run a quick evaluation of the situation, based on your beliefs about your capacity to manage the danger of uncertainty for survival.  It is at this point that the emotional brain decides to send information to the thinking brain (called the high road) or to send the information to the amygdala so the fight/flight response can be activated (the low road).  Notice that thinking has not occurred yet.  Thinking is only included in the loop if the stressor has not been evaluated as a threat by the emotional brain.  If the primitive evaluation points to present danger, rational thought is not included in the emotional response of the trader to the markets.  This is what this sequence looks like:


    Activating Event   →       Emotion   →      Evaluation (Beliefs)   →      Thinking     →     Behavior


When you go back to the vignette, you discover the Activating Event in this sequence – the trade going against him.   He’s only seeing the tip of the iceberg.  And because of that, he’s missing the crux of the problem.  But in his story when reviewing the event, Emotion, Evaluation, and Thinking – the meat of the problem – are missing.  To him, the Activating Event led to his fight/flight behaviors.  This is where his lack of Mindfulness skills and understanding of emotions keeps him stuck in self-defeating responses to the challenges of uncertainty and risk found in trading.

The emotional brain is only doing its job.  It sees uncertainty as dangerous.  And until the trader can train the emotional brain to move from interpreting uncertainty as a dangerous threat in the short-term, rational thinking will always be hijacked when the trader is experiencing the default programming of his or her survival instincts.  The brain and its primitive survival instincts are simply doing the job that they evolved to do.  Nobody told the emotional brain about the Probability of trading and the need to respond to uncertainty differently in this new environment. This is where Mindfulness comes in.

Mindfulness – the Tool for Re-construction of Your Emotional Response to Uncertainty

First, what is Mindfulness?  For now, we’ll define Mindfulness as noticing what you are noticing – noticing what’s behind the complacency of the ordinary.  It is the recognition that there is an Observing Self that can notice circumstances without reacting to them.  Mindfulness also is the recognition that you and your thoughts, and you and your beliefs, are not the same.  This is the game-changer…that there is an awareness outside of thought and belief.  Mindfulness is the capacity to step back and observe and notice, rather than simply being sucked into every thought, every emotion, and every belief that arises in your mind.

It is also the recognition that what we call the mind is more like a committee that is occupied by a number of competitive voices or points of view that are often contrary to one another.  You experience this phenomenon every time you struggle with self-doubt, every time you beat yourself up for a mistake, and every time you experience temptation to chase a trade that is beyond your better judgment.  In Mindfulness you are choosing to turn toward this internal struggle rather than to avoid it.  And you become curious about this power struggle going on in your mind and recognize that you are not having thoughts.  In fact, they are having you.  And in mindfulness, you are choosing to explore this mystery of yourself. 

Where Do You Start? 


If you are not your thoughts, what are “you”?  This is a good question that we will address a little later.

First, you start by observing the biology of your emotional nature. Why?  Because emotions are biological first and foremost.  And as they trigger and gain strength – they take over the mind.  So this is the ground floor level of Mindfulness – observing emotions in the body.  Each emotion will have a biological signature associated with it.  That signature includes such things as the way you breathe, the tension held in muscle groups, and your heart rate, among other attributes of an emotion.  These attributes are highly observable once you know what to look for and become mindful of them.  For many, it is a revelation to recognize that emotions have been hiding in plain sight before they hijack the trading mind.  By simple techniques of diaphragmatic breathing, muscle relaxation, and calming self-talk, the intensity of an emotion can be managed so that it never reaches the threshold of hijacking the trading mind. 

You do this by becoming more aware of what your body is doing as you experience uncertainty and risk.  Most people are surprised to find that they are holding their breath or breathing rapidly and shallowly as they trade.  This has been going on underneath the radar of your awareness, but with mindfulness you are bringing this aspect of your emotional nature under observation.  And because of that, you can intervene and disrupt emotions like fear, anxiety, anger, greed, lust, and impulse BEFORE they gain the strength to overwhelm your thinking.  Mindfulness and emotional regulation go hand in hand here. 

As you become more mindful of the biological nature of your emotions as you when engaging the uncertainty and risk of trading, you will also discover that emotions that seemed to come out of nowhere and hijacked the trading mind are now more easily recognized and managed long before they become troublesome.  Here you are only using the skill of Mindfulness to become better aware of emotions that are already there – but that you have pushed out of your working awareness.  This is a powerful step toward emotional self-mastery and developing the potential of your trading psychology.  But it is not enough

Using Mindfulness to Intervene into Your Hidden Self-Talk 

Have you ever noticed all that “talk” going on inside your head when you are facing ambiguous moments?  If you haven’t, you better start noticing (being mindful of) the unfiltered thoughts running through your mind, particularly when you feel the pressure of the moment. You have to become aware of this “self-talk”.  This self-talk is called the Internal Dialogue and Mindfulness is a powerful tool in learning how to master both the thoughts and the emotions that occur as you engage the uncertainty of outcome – and the conversations running amok in your head. 

You experience this Internal Dialogue when you experience self-doubt (i.e. “should I or shouldn’t I”, “what if I’m wrong”, etc.), beating yourself up (“you idiot, you’re never going to make it”, etc.), over-confidence (“just do it, think of the money you’ll make”), or revenge (“I’ll make you pay for that”).  Traders attempt to push the struggle of the Internal Dialogue away because it is uncomfortable or because it is just “me” talking.  Nothing could be further from the truth.

The first powerful thing about Mindfulness as a tool is that you start noticing the thoughts flying around in your head.  In Mindfulness circles, this incessant activity of thoughts in your mind is often called “Monkey Mind”—lots of chatter, but no disciplined order of thoughts.  You just can’t let them have a life of their own.  Instead, through Mindfulness, you begin examining them.  Not just noticing them, but examining them.  And what you find is that, upon examination, most of the negative or exaggerated assessments contained in the thoughts running around in your head have no basis (or little basis) in fact.  They are just ungrounded assessments that have taken center stage in your mind, not because they are true, but because then are the loudest in an undisciplined mind.  Mindfulness is where the negative assessment machine in your head is no longer given a free ticket to control the thinking that goes on in your mind without examination.  This changes everything.

A new voice begins to show up in your mind.  Where once thoughts simply intruded into awareness at inopportune times while you were not looking, now a new power to examine and question thoughts and their assessments of you and your performances arises.  This aspect of Mindfulness is called the Observer of the Self.  And it is particularly important in developing the mind of the trader to effectively deal with the uncertainty and ambiguity of trading or active investing.

Through the development of a Mindfulness practice, you discover that you and your thoughts are different from one another.  In Mindfulness you discover that there is an awareness that exists outside of the thoughts that occur on the screen of the mind or heard with the ears of the mind.  In fact, not only are you and your thoughts different from one another, but another startling discovery occurs – you are not having thoughts; they are having you.  In your mindlessness, you have been pulled along by cascades of thoughts rooted in emotional responses handed down from your history and adaptations to circumstances.  (That is the mind you brought to trading.)  They are now running on automatic with little or no input from you in this new world of trading that has very different rules of engagement.  In waking up to Mindfulness, you start taking this automatic nature offline and begin to reexamine your thought life.  This is where you can begin to construct a very new mind that engages the challenges of uncertainty.

From Mindfulness to Performance Mind

A powerful leap has been made.  We first started examining Mindfulness as a tool by which to observe the biology of emotion and to better manage the emotion BEFORE it takes over the mind.  Then a jump was made where Mindfulness was being developed as a tool to examine thoughts that run through the mind with reckless abandon.  Getting unglued from identifying with thoughts as “me” is a revelation for many.  But there is more.

In the same way that you and your thoughts are the same – that there is an awareness watching the thoughts rather than being the thoughts – you and your beliefs are not the same either.  There is an awareness watching the beliefs rather than being the beliefs.  Getting the Observer of the Self unglued from a belief structure and reconstructing the beliefs into higher functioning is the third tier of Mindfulness. 

Ultimately Mindfulness can be used to observe the very beliefs (evaluations of the Self) that drive your mind as it engages uncertainty.  These are not the beliefs you TALK about having.  These are the beliefs that express themselves as you engage uncertainty and risk in the moment.  These are the very beliefs that you are projecting onto the markets.  They are the same hidden beliefs that produce the gap between the potential you see in your trading or investing and the results of your efforts. 

Learning to find and alter these is the transformative nature of Mindfulness.  You are actually using the skill of Mindfulness to see what you have avoided seeing.  And with Mindfulness you discover it is hard to hide from your fears.  Your trading account cuts through the chatter in your mind to reveal whether the beliefs you are projecting on the markets can extract capital consistently or if your beliefs about your capacity to engage uncertainty create a mind that gives capital back to the markets.

The tough part of Mindfulness at this level is that all traders want to be “winners” so there is a bias not to see the obstacles to successful trading.  Yet as any consistently profitable trader knows –the art of losing must be mastered in order to become consistently profitable traders.  This is exactly what Mindfulness can deliver.  As a discipline, Mindfulness can help you see exactly what you have been hiding from yourself.  In the gap between your potential and your results lie the beliefs you bring to trading.  It is these beliefs that have to be revealed and changed.  Mindfulness helps us to not take it so personally.  The mind you brought to trading was never going to be the one that brought success you success in trading. 

The shift from certainty-based thinking to probability-based thinking is necessary.  And Mindfulness is the tool (once you’re comfortable with it) that allows you to shed old self-limiting beliefs that are no longer functional and build a new trading psychology to embrace the challenges of Uncertainty.  The potential is there.  Becoming that potential is much easier when you learn to step back out of thought and beliefs and recognize that the Self is malleable.  And Mindfulness is the tool to shape that potential.There is no elusive Holy Grail of Trading “out there” in all the “stuff” of trading.  There is, however, a diamond in the rough (called your mind) that has the potential to become what you have been seeking.  Like any other skill, it has to be developed from an untested talent to a dependable skill.  Self-development of your trading psychology is a necessity, not an option.  And Mindfulness is the tool needed to develop the potential you have as a trader.  The only question is whether you want to stay convinced “you are right” or whether you want to be effective.  Your trading account will expose the answer – if you are willing to be Mindful of what it is revealing to you.

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