In the last installment of my series, Seven Lessons I’ve Learned, we will cover a part of investing and trading that can change how everything else works: the mental game. Like with any peak performance activity, the absolute top performers have gotten there through developing both their skills and also their psychology and mindset. Peak performers are the kind who rise to challenges, who play best when the pressure is on, and who are able to keep training and working until they get to be best, owing to sheer willpower and grit. They also are able to experience Flow—when you’re fully absorbed in what you’re doing and enjoying it so much that time seems to melt away.

Of course, people often throw around the term “the mental game” without really defining it. What does it mean to have a mental game, let alone a good one? For the purposes of this article, the mental game is the full range of mental and emotional preparation that you commit to above and beyond your normal skill. Baseball players learn to hit, pitch and catch; snipers learn to shoot a target 600 meters away; musicians learn to play a piece flawlessly in front of 20,000 people. All of these are skills which demand peak performance to execute well.

The mental game is above and beyond these skills: it’s the area of how you prepare your own psychology, calm your emotions, deal with your fears and use tools like mental practice to avoid pitfalls and to enhance your overall performance. Top performers from many fields rely on having a solid mental game to boost their performance. We’re going to explore what those tools are and how we can apply them to the markets.

Throughout this article, I’m going to assume that you have your investing skills down pat and are now focused on taking your performance to the next level. If your skills aren’t refined or you’re not sure, then I would encourage you to check out another post from this series, Lesson 4, which talks about the interaction between skill and psychology. Basically, your most important task is to define your methodology and make sure that it conforms to the Basic Truths of Trading, which are the characteristics shared by all good methodologies. After that, you should work on sticking to your methodology, no matter what. This is a basic skill to have: Planning the Trade and Trading the Plan. You will need to spend a lot of time on this area of your trading—building and refining your skills and getting to the point where you can put on or take off positions almost automatically. After that, you can move on to a more explicit focus on the mental game.

To begin, we should understand the ways in which boosting our mental game can help us. The most obvious is boosting our own confidence. We all want that extra belief in ourselves, that feeling of just knowing that we are the best and can do anything. Surprisingly, there are a variety of ways that we can do that. The second is through cultivating mindfulness. This is a catch-all expression which denotes having greater awareness, calm and the ability to moderate our emotions. While it may not directly help us to throw a football farther or to run a mile faster, it will help us to become better performers overall. Moderating our emotions is obviously a critical element of success in trading, which is the main reason that I brought it up here. Thirdly, we can use psychological tools to address any shortcomings or weaknesses we may have, such as anxiety, lack of confidence or over exuberance. These fears can be crippling because even though we know intellectually what we need to do, we may not be able to execute. My al-time favorite SMB blog post, Trading Is All Psychology, is a brilliant case study of exactly this problem. The fourth is mental practice. When used to supplement our regular activity and practice, research has shown that mental practice can be remarkably effective in boosting performance. Together, this toolbox will help you to achieve the mental game that you want.

This toolbox is of critical importance when we’re investing or trading because of one simple fact: trading is almost entirely mental. It’s all about making the right risk/reward decisions, not about making money, as I emphasized in Lesson 1. Unlike in sports or music or even surgery, there’s no physical component. If you’re really tall, that will help you to be a better basketball player; if you’re very dexterous, that will make you a better piano player; if you’re short and light, that makes you a better jockey. None of that makes any bit of difference to a trader or investor. Because of this, it’s even more important to sharpen the mental game in trading versus other peak performance activities, because the skill set is entirely mental. We want to be in the best state possible for making decisions. We want to be calm and focused and on an even keel emotionally.

How do we accomplish that? What are the main tools and how we do use them in investing and trading? The first is mental practice and visualization. This is one of the critical tools used by peak performers in all fields. When asked how he was successful in various fields, Arnold Schwarzenegger responded:

“I visualized myself being and having what it was I wanted. Before I won my first Mr. Universe title, I walked around the tournament like I owned it. I had won it so many times in my mind that there was no doubt I would win it. Then I moved on to the movies, the same thing. I visualized myself being a famous actor and earning big money. I just knew it would happen.”

I have written extensively about mental practice and visualization—here is the resource page for visualization tools and techniques. It has a litany of uses and we will go through them. We use mental practice is to simulate something that we want to do as we would like to do it. Our brains don’t distinguish between imagination and reality. When we are practicing mentally, we are firing and reinforcing the exact same brain circuits that we would when we perform the skill itself. The mental practice sessions will reinforce how we want to perform, making it more likely that we will perform that way.

Peak performers visualize all the time, whether it be hitting the perfect 3-pointer or driving a perfect lap on a racecourse. We should do the same thing, imagining a perfect trading day down to the most minute detail. We should think of how we will start the day, how we will be working and following the markets during the day, and when we will be putting on and taking off risk. Here is the original link with details on how exactly to do this. The goal is to create and reinforce good trading practices and habits in our mind—essentially, you are programming yourself to carry out your plan flawlessly. You are building a strong mental circuit that can withstand even the most stressful conditions in the market.

A more specific usage for your mental practice is to imagine certain behaviors or outcomes that you want. You can be more specific than just imagining having a productive day in the markets—you can imagine yourself having a productive day with a focus on keeping your emotions regulated and under control. This way, you are signaling to your brain that you want to be cool as ice, staying unfazed by any market volatility or by your own P&L swings. Investors and traders everywhere desire this kind of emotional control, and this step-by-step exercise gives you the exact tools to disengage your emotions from your trading. Peak performers everywhere use tools that help them to sidestep their emotions, but this is absolutely critical for traders. One panicky trade, or one episode of greed can undo months of work. Up your game by working on your emotional control.

In addition to building skill, peak performers know how to harness the power of focus. They are live for being in Flow, or “in the zone” as athletes call it. While we may have the skill, we want something more — we want that absorption and the ability to perform with undivided focus. Think of Michael Jordan in the last minute of a close game—he is completely immersed and focused on the game and nothing can distract him. This is where we want to be and where the mental game can be so helpful, once we learn how to summon up the “in the zone” experience on command to be able to give it our all. For some of us, just being able to summon up this experience would transform our experience in the markets and make us that much more capable. I have covered how to get “in the zone” at will in this post, and I would encourage you to practice the exercise until it becomes automatic.

Top performers also seek to address the weaknesses in their mental game. These weaknesses could be anything from anxiety, to hidden fears to over exuberance and greed. Whatever they are, this is an area where you also need to up your mental game in order to remove the obstacles that hold you back from being the best. Mental practice is one way—as you practice doing things the right way, you are training your brain in how to succeed, in spite of fears of anxieties. This is the point of the mental practice exercises. Nevertheless, you can take more specific steps to remove fears and anxieties. One is the technique that I suggest for identifying and removing fears, which I elaborate on in this article. If you’ve ever suffered as debilitating as a blowup, then it may sound crazy and fanciful to think that you can dial down the impact of previous bad experience. But believe me, you can do it with the right tools. Top performers do exactly this. How else do you think that a champion closer like Mariano Rivera can go out there and pitch, knowing that the game is on the line with every pitch? And even if he does give up the game-losing home run, he goes back out there the next day and does the exact same thing.  I cover more in my post Choking and Trading, about how to deal with performance anxiety.

The last practice or technique is to cultivate mindfulness. As trading coach Steve Ward defines it, mindfulness is “A way of paying attention: on purpose, in the present moment and non-judgmentally to whatever arises in the field of your experience.” The goals of mindfulness are three fold:

1. To cultivate better awareness, so that you are more in the present moment
2. To become detached, so that you don’t react automatically to thoughts and feelings
3. To reduce the “chatter” in your brain—the random thoughts that are vying for attention and polluting your focus

There are many practices that can help us achieve better mindfulness, but the most important one is training your attention. This is the one popularized by Eckhart Tolle in The Power of Now.

1. Choose an experience to live in completely, where you are fully present.
2. Dwell on the various details of your reality, drinking in the experience: the color of the leaves, the texture of the grass and sky, birds chirping. Learn to appreciate more details, a wider scope of reality, sounds, and feelings than you had before.
3. How focused are you on the present moment? If you can stay completely absorbed in the present moment for several minutes, then you’re doing well.
4. If not, then try to empty your mind of all the noise and chatter that you’re normally distracted by. Imagine yourself blowing all away all of those extraneous thoughts, like extra dust that has accumulated on the shelf.
5. If random thoughts or feelings do come up, don’t fight them. Acknowledge their existence in a nonjudgmental, detached way. Examine them to see if they’re useful—if not, then let them pass by, out of consciousness. If they’re harmful thoughts, don’t indulge them under any circumstances.
6. Imagine that you’re an outside observer who is watching you—stay independent and just “watch” these thoughts and feelings flow in and out of your consciousness, while you stay absorbed in whatever you’re doing. This will give you the detachment you need to stay calm and focused.

This exercise will help you to practice observing what is, rather than acting on it. This is a key skill in the markets—observing what is there, not what we want to be there. Once you have observed properly, then you can proceed to making the right decision. Moreover, you don’t want random thoughts and feelings along the way to knock you off course—you want to be able to let them drift in and out of your consciousness, without necessarily acting on them. Just like radio has a ten-second delay between the announcer and the actual broadcast, you want to build in a certain delay between your emotions and your reactions—so that you can choose whether or not to react at all. Oftentimes, you should just let things drift in and out of your consciousness.

Journaling is one other idea to consider for your mental game. This is a great way of tracking your moods and what you’re thinking and feeling. Ideally, you can identify when you’re off track and get off track. For many people, the mere act of describing and exploring their inner world will be therapeutic and help them stay steadier. For others, the journal could be just a gameplan and a way of processing their thoughts about the markets, but the structure proves therapeutic. Explore journaling for yourself and see what benefits it brings you.

In many ways, the mental game is like Trading 2.0. Just as soon as you think you understand the markets and your methodology, then you confront all sorts of psychological challenges that you never expected. Whether you are a long-term investor or a day trader, you will confront greed, fear and frustration. You will want to perform at your best—and I assume that you will want to enlist any technique that will help you get there. The mental game is the key to taking it to the next level and new heights of profitability.

 No relevant positions

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading