The Fourth Week of More Mindful Trading

In this post, I will continue my eight week experiment with cultivating mindfulness and trading. The earlier posts in the series can be found here:

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.

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—like 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.

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 review of the literature on mindfulness. There have also been several good books that have come out recently, focused on mindfulness for traders and investors. Two particularly good ones are TraderMind by Steve Ward and Trade Mindfully by Gary Dayton. 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. I liked the material so much that I incorporated some of it into my own book, Peak Performance Trading and Investing. I liked the most Steve Ward’s definition of mindfulness in a markets context: “trading 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”.

I am a friend of Steve Ward and a big fan of his work. His recent book TraderMind 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.

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:

Week 1 mindfulness score: 45

Week 2 mindfulness score: 45

Week 3 mindfulness score: 48

Week 4 mindfulness score: 50

This week’s program, Week 4, is entitled “Managing Urges and Impulses”. 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: “Once you have ordinary intelligence, what you need is the temperance to control the urges that get other people into trouble in investing”. While you need intelligence to learn the basics of the markets, you won’t achieve great success until you have learned to master yourself—meaning your emotions, state, etc.

When we get in trouble in the markets, it’s often because we don’t or can’t 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—fixing a loss, even if it wasn’t 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.

Obviously, we want the means to resist our worst urges and to continue to make rational and profitable decisions in the markets. 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.

This week teaches us to manage our thoughts. The homework consists of:

Re-reading Chapter 6, “Managing Urges and Temptations”, and doing the exercises. This chapter is mostly concerned with understanding how urges arise and how to cope with them. Eventually, you will learn how to recognize an urge or an impulse, but to choose your reaction to it—or just to let it drift away. There are several exercises which help you with this process.
Practicing the any of the exercises from the previous three chapters at least 5 times this week.
Using the “urge surfing” technique whenever you become aware of an urge.
Habit releaser: Go for at least one 15-minute or longer walk this week; walk slowly and mindfully, take a look around, open up your senses.
Complete the practice form.
Reflect on the following questions to gauge your progress so far:

What am I learning through this process?
What have I noticed so far?
What do I need to do over the next 4 weeks to get the most from this course?

The first exercise is entitled “Reflecting on Your Trading Urges”. I will share some of my answers to the questions to give you an example of how you are supposed to complete the exercises.

What urges do you find yourself experiencing within your own trading?

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’ve started to research and either I’ve passed on (because it’s 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’ll feel an urge to act right now, even if the position doesn’t make much sense.

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’t see many opportunities, then I’ll find myself bored—and 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 whose favorite line was “when there’s nothing to do, do nothing”—immortal advice. This training has made me less susceptible to this urge over time, but nonetheless it can still strike.

When do these urges arise?

As I mentioned, the first urge usually arises when I see the start of price momentum in a stock that I’d 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’s more that I would feel remiss for missing out on such a big move and tell myself that it was “obviously” primed for a big move and that I “should have known”.

In terms of the urge to do something, it usually arises if I’ve spent a period of several weeks looking at the markets but haven’t opened or closed any positions. Usually, I would start to wonder if I’m missing something in the names that I’m researching or I was looking in the wrong places. After all, the fact that I’ve 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’s nothing to do.

What action do you take when these urges are present?

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.

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, 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 “checklist” – 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 need to do before putting on or taking off a position—instead of thinking about what I want to do.

What are the consequences of those actions

The consequences in the past were dumb positions which led to poor results. I used to act directly on my urge to “do something” 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’t followed my normal risk management procedures. I was so anxious to “make money” 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.

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—but it still has to be vetted like any normal position would be.

This week’s practice included an exercise where you had to do a normal relaxation session and then pay attention to you urges—but 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. This was definitely the opposite of what I expected.

It’s 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 “urge surfing”, 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’s just a random or an unhelpful urge, then we try to tame the wave. One way is to verbalize the urge—where you acknowledge the urge to “hold a trade until it gets back to even” or to “take the pain on the short position”. This will help you to widen the difference between you and the thought itself.

The benefit of mindfulness is learning to be calm, collected and in control of our emotions. 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.

Sometimes, traders and investors have trouble with too much calm. They associate a lack of activity with boredom—and then they get tempted to put on marginal positions just to stay engaged in the market, even if they’re not worthwhile. But as Steve Ward writes, “Boredom 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”. The key is to take the right decision and pursue the right behavior, 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.

I’ve written earlier about the mindfulness practices from Weeks 1 through 3, so I won’t 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.

One of the exercises in this week’s 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’t truly experiencing or immersing myself in the walk. This time, it was nice to fully switch off my brain’s 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—engaging all of your attention can feel like sensory overload. But once you get the full experience of nature, it’s hard to go back to the old, harried and distracted way that you used to go for a stroll.

Overall, I can see improvements from the mindfulness training. In the time that I’ve 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 “urge surfer”. Nonetheless, I feel that I am getting better.

I have another four weeks left of Steve Ward’s Mindfulness Program. I hope that you watch this space and do the exercises along with me. Let’s hope that our mindfulness improves together.

No relevant positions

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

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