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TRADE MINDFULLY

Achieve Your Optimum Trading Performance with
Mindfulness and Cutting-Edge Psychology

Gary Dayton, Psy.D.

 

 

 

 

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Additional Praise for Trade Mindfully: Achieve Your Optimum Trading Performance with Mindfulness and Cutting-Edge Psychology

“I have had the good fortune to work with Dr. Gary Dayton over the last 10 years and I have recommended his work to thousands of our TradeGuider customers. The importance of mindfulness when taking a position in the markets is little understood by many retail traders and investors. Dr. Gary's ground breaking book will be an inspiration to anyone that studies it. The most important thing to understand about Dr. Gary is that not only is he an expert in the field of trading psychology, he is also a real trader who has been through the journey required to finally master the markets and understand the game on Wall Street. I highly recommend you read this book and use the extensive knowledge conveyed brilliantly by Dr. Gary to take your trading and investing to a higher level.”

—Gavin Holmes, Chief Executive Officer, TradeGuider Systems International; author of Trading in the Shadow of the Smart Money

“Regardless of the chosen methodology, as traders struggle with anxiety and fear, their actions undermine their trade plans and best interests. In Trade Mindfully: Achieve Your Optimum Trading Performance with Mindfulness and Cutting-Edge Psychology, Dr. Gary Dayton thoroughly explains why attempts at correcting erratic ­trading behavior by controlling thoughts and emotions do not work. He recommends practicing mindfulness combined with the latest performance psychology to resolve these complex issues. Dr. Gary Dayton states that mindfulness is one of the most powerful skills all traders would be wise to acquire. I found this innovative book to be a well-researched, invaluable resource for developing the mental skills necessary to achieve trade ­mastery.”

—Ron Rossway, President, Denver Trading Group

“In Trade Mindfully, Dr. Gary Dayton uses real-world examples to explain how mental traps sabotage traders from achieving the results they desire. Using forms and practical checklists, he then develops the foundation to build your own structured process for success. Trade Mindfully serves as an effective handbook for changing your thinking about the importance of emotions and how to work with them—not against them.”

—Corey Rosenbloom, CMT, President of AfraidToTrade.com; author of The Complete Trading Course

TRADE MINDFULLY







The Wiley Trading series features books by traders who have survived the market's ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For more on this series, visit our website at www.WileyTrading.com.

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.

ACKNOWLEDGMENTS

Much appreciation goes to my wife and partner, Ning. She is known to traders by her American name, Helen. She read every word of this book when it was a draft and offered superlative editorial suggestions. For this and all her support during the lengthy period during which this was written, I am truly grateful.

To David Weis, Professional Trader and Market Analyst, for coaching me in trading. David taught me to read the markets through his interpretation of the Wyckoff Method. His careful and masterful tutoring helped me become technically proficient so that I could focus more on the psychological aspects of trading.

To Gavin Holmes, CEO of TradeGuider Ltd., for inviting me to speak on trading psychology at a seminar he produced in San Francisco. That experience taught me that not only did I have something of value to say to traders, but traders understood the importance of trading psychology and were eager to learn about the mental side of trading. Gavin had the foresight that psychology was a necessary part of trading and our continuing work together has brought psychology before many traders across the globe.

A special note of thanks to Dr. Charlie Maher, sport psychologist for the Cleveland Indians Major League Baseball Team and Professor Emeritus at Rutgers University, for generously teaching me his model for sport and human performance psychology which formed the foundation for the book's trading psychology process.

To Kevin Commins, formerly of John Wiley & Sons. Kevin made the initial contact and encouraged me to write this book and document my approach to trading psychology.

To all the psychologists and researchers whose work is referenced herein and upon whose shoulders I stood to write this book. I'm deeply indebted to their insightful research and their work on mindfulness, acceptance, and commitment. They deserve much credit for advancing the science of psychology and providing their work to other psychologists like me, who in turn distill it and provide it to you.

To the publishing team at John Wiley & Sons, including Meg Freeborn, Senior Development Editor; Claire New, Senior Production Editor; Tula Batanchiev and Tiffany Charbonier, Program Coordinators; and Evan Burton, Editor, for championing the book and for making what still seems like a daunting project a reality.

Thanks to Lane Mendelsohn, publisher of TraderPlanet.com, for the use of some of the graphics in the book.

And finally, I'd like to express my sincere appreciation to the many traders whom I have met, taught, and with whom I have worked. I have learned more from those seeking to better understand and improve their trading psychology than any other source.

ABOUT THE AUTHOR

Gary Dayton, Psy.D., brings together psychology and trading in his work as a trading psychologist, trading educator, and active trader in the S&P e-mini and currency markets. He teaches traders advanced trading skills through his Deep Practice program—a unique online weekly training in which traders face stimulating chart reading and psychological situations that take them to new levels of trading insight and learning. Gary is a popular international speaker who has presented to traders in England, Singapore, Malaysia, Australia, and the United States. A licensed psychologist, he earned his doctorate at the Graduate School of Applied and Professional Psychology, Rutgers University. He is pres­i­dent of Peak Psy­chol­ogy, Inc., a con­sult­ing firm that spe­cial­izes in devel­op­ing peak perfor­mance in traders.

Connect with Gary online at his website: www.TradingPsychologyEdge.com and Twitter: @DrGaryDayton.

INTRODUCTION

If you have picked up this book and are reading it, chances are you have had some trading difficulties or have tried but have not yet been able to take your trading to the level you desire. You may have experienced one or more of the following in your trading:

These trading difficulties hurt. They not only hurt your account, but they also cause mental and emotional suffering. No other profession tests your psychology as does trading. These difficulties and unskilled trading behaviors arise from the underlying mental and emotional challenges traders face. Most likely you have made considerable effort to overcome these difficulties but the methods you tried have probably failed you. After a while, you may question whether anything will ever work, or worse, you may question your suitability for trading.

This book is different from the methods you have tried. It offers mindfulness, a state‐of‐the‐art method backed by scientific proof, and a specific trading psychology process: together they can unlock the door to managing your mental and emotional challenges and to excellence in trading performance. If you are determined and are willing to commit to the effort, this book will definitely help you.

I am trained as a clinical psychologist. I became involved in trading and trading psychology more than 15 years ago. Like other traders coming into the market, I have experienced most of the difficulties listed above. Personal experience and the experience of working with other traders taught me that the conventional trading wisdom of controlling and eliminating one's emotions from trading does not work. Quite the contrary, the more we struggle to try and control our feelings, the more our attention is distracted away from our trading, and the more erratic our trading becomes. Not only does the conventional wisdom not work, it is wrong. Countless traders have traded poorly and failed to learn the trading skills following conventional wisdom because trying to get rid of our thoughts and feelings in the usual problem solving way actually is the cause of our problems. We become stuck in a rigid and intractable mental pattern and our trading suffers.

Albert Einstein once said, “You cannot solve a problem from the same consciousness that created it. You must learn to see the world anew.” Einstein could have been talking about trading when he made this remark. We have to think differently to overcome the universal mental challenges of trading. This book will show you how.

I began to think differently about trading psychology when I saw something wonderfully mind‐blowing at a psychology conference. A video presentation showed a psychologist treating a person who was depressed and suicidal. Within a single therapy session, however, the person had changed markedly. She was no longer depressed and no longer suicidal. She no longer needed psychological treatment. I couldn't quite grasp what the psychologist was doing because it was very different from what I had learned and practiced as a psychologist—it even seemed counterintuitive, but I knew deep in my bones that whatever it was, it was damned powerful.

The different way of thinking about psychology is called Acceptance and Commitment Therapy, or ACT. When I first saw that presentation, ACT was new. There wasn't much written about it and only a few had experience with it. That has all changed. Now there is an explosion of books, scientific papers, and conferences and more psychologists are adopting it because it is so effective. Settings outside the therapy room are also beginning to embrace it. Susan David and Christina Congleton, for example, have written about the mental agility that ACT promotes specifically for corporate executives and industry leaders in Harvard Business Review Online. Wouldn't you like some mental agility in your trading instead of mental struggle?

One of the core components of ACT is mindfulness. Mindfulness, as you will learn in this book, is incredibly important for traders. Although it has its roots in Eastern traditions, modern scientific research shows that it has powerful ability to positively impact us psychologically and even enhance the structure of our brains (as seen through neuroimaging studies). ACT's approach to mindfulness, along with its other advanced psychological techniques such as defusion and commitment to actions that bring high value to our trading, can dramatically change your trading psychology for the better. Instead of struggling to try and control your unwanted thoughts and feelings, mindfulness and other techniques allow you to be a sort of mental aikido master where you can sidestep them and redirect your focus onto what's really important, your trade.

It's not sufficient, however, just to develop mental agility if you want to achieve excellence in trading. At its core, trading is a performance‐based activity. We develop trading knowledge, skills, and abilities and then apply what we know and can do by performing in the markets. The best performers in any field are guided by coaches, mentors, and specialized training. The structured guidance affords opportunities to learn skills and overcome mental challenges. Most traders do not have structured guidance. They are left on their own. This book sets out to change this.

What matters most in any performance activity is having and adhering to a process. A process is a well‐defined series of actions or steps taken to achieve a desirable result. The more consistent we become in a sound process, the better we can apply our knowledge, skills, and abilities and the better our trading results will be, all other things being equal. My ideas about a trading psychology process were born in a graduate course on sport and human performance psychology taught by Charlie Maher, an accomplished sport psychologist. Charlie's course helped me shift my ideas of trading psychology. This shift involved moving away from traditional psychological methods and techniques of trying to change one's thoughts and emotions to applying psychology directly to the process of trading: how we prepare to trade, how we execute our trading, and how we evaluate our trading performance.

This is the first book about a trading psychology based on the power of mindfulness and the bedrock of process. The combination of a robust trading psychology process with mindfulness and other cutting‐edge mental skills can help you excel in your development of both the psychological aspects and the technical aspects of trading.

How This Book Is Organized

This book is divided into three parts. Part I (Chapters 1 through 4) discusses the unique challenges traders face, both mental and emotional. In a very real sense, in order to succeed at trading, traders need to know how they fail. Part II (Chapters 5 through 8) introduces mindfulness, what it is, how it can help traders meet the mental and emotional challenges of trading, and how to do it. Part III (Chapters 9 through 11) presents a robust trading psychology process, made up of three distinctive time frames and the associated high‐value mental skills traders can develop that can take them on a continuous improvement path to excellence and mastery of the trading game.

Part I

There are many psychologically influenced challenges to overcome on the path to trading success. The unaware trader can very easily be blindsided by cognitive biases and heuristics—mental rules of thumb we use effectively and routinely in our daily lives, but are inappropriate for trading. Emotions, too, can be a significant challenge for traders. Cognitive biases and emotions can cause you to hold onto losers, take trades at the wrong time and in the wrong direction, jump into unplanned trades, and other erratic trading. The chapters in Part I show you the root cause of erratic trading behaviors. Real-life examples of traders1 in actual trading situations make the concepts clear and comprehensible. Practical exercises and forms are provided so you can begin to identify and constructively address the mental and emotional difficulties and erratic trading behaviors that you experience in your trading. All exercises in this book are available in larger, PDF format for download at the author's website (www.tradingpsychologyedge.com).

In Part I we also look closely at fear and its various forms, along with stress, other strong emotions such as anger and boredom, and emotional hijackings—those emotion‐dominant states that cause us to act imprudently and can ruin a trader's account. We introduce Emotional Intelligence, an important psychological ability, which helps you identify your emotions, understand what they mean, and the patterns they generally follow. This alone can give you a significant advantage in your trading.

We review traders' default methods to cope with unwanted emotions, especially fear, and show exactly why many of these methods do not work. We review the psychological experience of loss aversion, why it is actually natural for us to cut winning trades short and what we can do to address this behavior. As we conclude Part I, we also show that trying to eliminate emotions from trading—what conventional trading wisdom advocates—is the exact wrong thing to do. After reading this section, you will never again think the same way about emotions.

Part II

Part II introduces mindfulness. Mindfulness is one of the most powerful skills all traders would be wise to develop. Robust research has shown that mindfulness has profound value to traders through its many benefits. With the enhanced focus and concentration afforded by mindfulness, you can see the market and the trading opportunities it presents more clearly. Mindfulness directly helps tame the fear response, strengthens internal emotional regulation, and significantly reduces stress. Mindfulness teaches that you can trade well even though you may have unwanted emotions. The practice of mindfulness along with the advanced psychological skills of defusion, acceptance, and commitment help you keep your focus on the high-value actions that best serve your trades so that you can execute them rather than be disrupted by anxiety, fear, and other unwanted emotions. Mindfulness also helps you reduce common trading errors caused by applying mental shortcuts (cognitive heuristics). It allows you to engage your deliberative mind and strengthens your decision making. Mindfulness also promotes learning and, together with deliberate practice (discussed in Part III), you can develop mastery in trading.

Several mindfulness practice scripts along with alternate suggestions of how to do mindfulness for you to use and develop your mindfulness skills are presented in Part II. Many of the mindfulness scripts have been recorded and are available on the author's website (www.tradingpsychologyedge.com) for download. There are examples to show you how to apply mindfulness in trading and how to use it along with other important techniques in overcoming psychologically difficult trading situations. When we are challenged by a trading situation that causes an emotional reaction, our attention automatically turns inward to our thoughts and feelings. We lose focus and our contact with the market and trade poorly. Mindfulness can correct this strong tendency. It helps us keep our focus where it should be: on the market. We also show you how to address both minor and major trading challenges with mindfulness and other state‐of‐the‐art methods. You are given an explicit protocol for overcoming your specific, challenging trading situations along with the details of how two traders used this method to successfully resolve problematic trading behaviors of cutting winning trades short and oversizing trades after a loss, respectively.

Part III

To achieve excellence and optimum success in trading, in addition to mindfulness and other mental skills, you will need a sound trading psychology process that helps you continuously develop both your mental and technical skills. The trading psychology process we present here is a psychologically informed framework for your development into a successful trader. The framework is adapted from Charlie Maher's sport and human performance model. This trading psychology framework consists of three core psychological principles of the trading process: High-Quality Preparation, Effective Execution and Constructive Self‐Assessment. Within each principle are four high‐value mental skills every trader will find beneficial. The process of personal growth and self-development is made explicit by identifying your personal developmental needs, creating SMART goals to address your needs, implementing the goals, evaluating them, and adjusting them until you transform a limitation in your trading into a new skill and ability you can rely on. There are case examples from traders to help illustrate and clarify these concepts. Specific techniques, skills, and procedures such as mental parking, the mental STOP, the Trader's Performance Assessment, and other beneficial practices are explained.

Although this is a book, it has been set up as a manual or handbook for trading psychology. There are charts and forms you can use to apply the information you learn to your personal situation. I encourage you to not only read the book, but also do the exercises, practice and develop mindfulness skills, and apply what you have learned to your trading. Let this book be your coach, mentor, and guide in your journey to take command of the mental and technical sides of trading. Trade mindfully and achieve your optimum trading performance with mindfulness and cutting-edge trading psychology!

Note

PART I

UNDERSTANDING
YOUR
MIND