Monday, December 8, 2014
Dayton, Trade Mindfully
Dayton, a clinical psychologist, sets a course for traders to follow that will, in the best case scenario, prevent them from being hijacked by their emotions. This is not to say that traders will be able to eliminate or control those emotions that undercut their trading success. In fact, trying to suppress, control, or eliminate feelings and thoughts usually only makes them worse.
Emotions are not only a necessary part of trading; they add to the quality of trading decisions. They are “a crucial component necessary in making decisions, especially in controlling and correcting reward-related and punishment-related behavior because these kinds of decisions always involve emotion.” Studies show, for instance, that people with frontal lobe damage cannot adapt their behavior to changing patterns of rewards. “[A]fter the experiment was over, the [brain-damaged] participants could accurately describe the tests, how the tests had changed, and also how they were incorrectly responding to the changes, signifying that they fully comprehended the tests, at least on an intellectual level. They could not, however, explain the dissociation between what they knew and what they did.” (p. 84)
So, the trader must provide room for emotions yet not permit them to wreak havoc on his trading. The key to walking what seems to be a fine line is, Dayton argues, mindfulness. As he writes, the “three characteristics of mindfulness—a heightened clarity of the market environment, focus on the here and now, and an understanding that thoughts and feelings are merely temporary events and not necessarily reality—can help the trader take action in the direction of what matters most in a given trade, as well as what matters most to him or her as a trader.” (p. 106)
Normally we fuse with our thoughts and emotions. That is, “thoughts and feelings are generated automatically by the mind and we don’t have much say over what thoughts and feelings occur. … The environment and the situations we are in highly influence what the mind tells us. … When fused, we uncritically believe the mind and become entangled in its story. This causes us to lose contact with the present. … When fused with our thoughts and feelings, we lose focus with the trading task at hand. … The mind can be remarkably shameless in the stories it will tell. When we are fused, we can’t tell the difference between what is truly useful and what is not.” (pp. 152-54)
The remedy for fusion is defusion, “the ability to accept thoughts exactly as they are for what they are (just words and feelings), not what they represent themselves to be (e.g., the truth).” For instance, ‘I am going to have a loss’ is a fused thought; its defused alternative is ‘I am having the thought that I am going to have a loss.’ “Letting thoughts go is possible by developing the skill of defusion.” (p. 158)
Trading is a stressful business, even if you’re an old hand at it. Will the stress of trading take a toll on our lives? Not necessarily, research shows. Premature death seems to be linked not to stress itself but to the perception that stress is harmful to our health. A study of 28,000 adults showed that people who experienced high levels of stress and who believed that it affected their health had a 43% increased chance of premature death. Those highly stressed people who did not believe that their stress was harmful to their health had the lowest risk of dying, even lower than people with low stress. My hunch is that in the first group were an outsize number of people who acted on their perceptions by engaging in harmful allegedly stress-reducing behavior, thus sabotaging themselves, and that in the second group were a good number of highly successful (and, yes, stressed) people who tend to live longer than folks lower down on the socioeconomic ladder. Whatever the case, believing may not necessarily make it so, but beliefs do shape actions and outcomes, for better or worse.
Dayton makes a strong case for mindfully accepting and defusing unwanted thoughts and feelings so that attention can remain on the task at hand. With practice, the mindful trader will be able focus on his trade rather than on, for instance, his fear that he’s going to lose money. The fear won’t go away, but it will no longer be the force that guides his actions.
The final part of the book, “Maximizing Your Trading Performance,” moves from the psychology of negative emotions and erratic behaviors to the positive psychology that can help enhance performance. Central to performance psychology is the Before-During-After process. “Preparing for trading in a high-quality way, taking our preparation into trading to maximize our trading abilities, and assessing our trading performance and results with the intent to improve our preparation and execution is the royal road to developing, advancing, and enhancing our trading.” (p. 273)