What Is Mindful Trading?
Mindful trading is trading without reacting to emotions.
Mindfulness is described as a ‘state of active, open attention on the present’ by Psychology Today and it is a way of thinking that allows the observation of thoughts and feelings from a distance without judgment.
No thought is good or bad – mindfulness accepts that all thoughts and emotions are valid. It can also be described as ‘living in the moment’.
Mindfulness might seem like a buzzword, a synonym for yoga and Zen meditation, but it is not about clearing your mind of emotions – rather paying attention to, recognizing and acknowledging them.
These thought processes happen in trading and everyday life, so if you can become slightly detached – as the observer of the thoughts and feelings rather than their helpless victim – you can block out judgment and find the state of awareness that is living in the moment.
In trading, mindfulness can help you make better decisions without either ignoring thoughts and feelings or reacting only because of thoughts and feelings.
A good trader can have several different strategies that make them successful.
Some traders prefer to trade in a mechanical fashion – completely taking emotion out of the equation to make trades.
In fact, this robotic trading is one of the major selling points of automated trading systems – algorithms that take emotion away from trading so there is no complicated interpretation and judgment to make decisions on when to push the button.
Aspiring to trade mechanically can work as part of a strategy but human nature can get in the way of decisions, with hesitations, fear of loss, worrying about the future and every other facet of emotion regarding trading.
Trying to hold these feelings back is not easy, and that is where mindful trading comes in.
Mindful trading involves knowing that these thoughts, feelings and emotions happen, that they are valid reactions to a situation, but that they are not objective measures of reality.
By identifying such feelings and understanding that they are there, you can come to terms with them before taking appropriate action. Sit with the thought or emotion and then take appropriate action.
There are some things that you cannot control, as a trader and during everyday life. Being able to recognize your responses, as something that is happening and not something that you are, helps you to be in the moment and stay detached.
Understanding your response to events – and being mindful about how your thoughts and feelings coalesce, whether those events are something that you can control or not – helps you to accept and therefore control your behavior.
Detaching from emotions means detaching from overconfidence (when winning) and self-sabotage (when on a losing streak).
This emotional equilibrium might seem a Zen-like idea but can help prevent reactions from impacting on trading decisions.
Becoming an observer of your thoughts and feelings and getting the detachment from emotions that is part of mindfulness allows better judgment when making decisions.
Understanding the reaction, living just in each moment and taking time to sit with feelings gives you the breathing space for better judgment, even when under pressure.
There are no knee-jerk reactions when problems are approached with mindfulness.
Avoiding confirmation bias, overconfidence or self-sabotage through a mindful appreciation of your emotional reaction allows for better decision-making.
Unlike meditation, mindfulness is not about completely clearing the mind. But it is about quieting the mental chatter that can get in the way of rational thought.
By identifying and accepting your thoughts, they hold less power over you.
You can then focus on what matters – what action you are going to take.
Better focus is beneficial for not only reacting to situations but also for creating strategies.
Understanding your emotional response to events and information helps you to process facts as they are presented rather than through your own conscious or subconscious biases.
Taking the time to sit with your emotions and thoughts when presented with new facts allows for better information processing – and then better decisions.
Being able to process information outside of your biases will also help improve your critical thinking skills.
Trading is a cut-and-thrust situation and making the best decisions under pressure can be difficult.
With mindful trading, when money becomes secondary to the love of trading, you can let go of worries and thoughts about past or future trades.
Without reacting to the pressure, whether winning or losing, a cleaner and more decisive execution of judgment can be achieved.
Remember that mindfulness is about being in the moment, and this is more easily achievable when you can minimize distractions.
Distractions can be in the form of errant thoughts, worries about the future, thinking about the past or even how you are feeling in terms of physical health.
If you acknowledge them and listen to what they are telling you, letting them go will be easier.
Letting go of those feelings will help you to remain undistracted.
Better decisions can be made when you are calm – this can be useful not only in trading but also in everyday life. Calm behavior helps you deal with problems in the most beneficial way.
Kneejerk reactions do not only happen during trading decisions. In day-to-day life, you will be presented with information and data out of your control that could cause you stress and worry.
If you value calm behavior, you will naturally put more effort towards cultivating it. Altering your priorities can alter your behavior for the better.
Practicing mindfulness, to calm the mind and see through the chatter, is a process. Mastering it will make it much simpler for you to react calmly no matter what might happen.
Breathing gives time for focus.
The breath is an important facet of mindfulness. Focusing on it creates a moment of calm – essential to good mindfulness practice.
Through breathing, focus can be placed on each thought, feeling and emotion as it arrives, so that it can be acknowledged, understood, observed, then let go.
Each breath can provide the mental space to be in the moment.
While focusing on your breathing, you are giving yourself time to process the information that you are presented with and your reaction to it before acting.
It is perfectly normal and necessary to have emotional reactions to situations.
Whether it is a reaction to an event that is your own doing, or something completely out of your control, the human responses of thoughts, feelings and emotions happen.
The key to practicing mindfulness is to truly acknowledge these emotions and sit with them so that you can then go on to make unbiased, calm judgments.
Emotions arrive and can feel strong and overwhelming like a tidal wave, but by acknowledging and accepting them, they will peak and pass on.
Trying to block emotions out only makes them get stronger as they try to metaphorically bash down the door into your mental fortress.
As you notice a thought or a feeling, isolate it and question it. Observe it without judgment – it is neither right nor wrong; there are no bad or good emotions.
Mindfulness is the judgment-free acceptance of your reaction and the clear-eyed choice of action to take.
Unbiased acceptance and observation are not skills that can be developed overnight. But they are worth the effort to develop – utilizing them will have a positive impact on your daily life and your trades.
As well as practicing through focused mindful meditations, there are other ways to be present and mindful.
For some, a short walk and fresh air are enough to allow for clarity of thought. Exercise is also an excellent way to practice mindfulness, whether cardio or more strength-based training.
Mindful reading of a book – completing a full chapter without distraction – or completion of a crossword, sudoku or another puzzle can bring space to be present in the moment.
Sometimes even making and drinking a cup of coffee, quietly and with full concentration, can be a mindfulness practice. The stimulation of your physical senses can be used to center you in the present.
Bringing mindfulness into your everyday life is excellent practice to make it second nature. This ensures that when you are trading, you are making the best decisions alongside your feelings and thoughts rather than despite them.
As a bonus, you will likely find positive effects of this practice in your day-to-day life.
As part of your mindfulness practice, align yourself with a framework to help you when you are reacting to information relating specifically to trading.
This can also be called a schema. It is a habitual way of processing and integrating information about a specific subject.
If mindfulness is part of your trading schema, it will form the foundation of all your thoughts about trading. Then, no matter how you trade, this routine and prepared mindset will make mindful trading a normal reaction.
Whatever way you do it (taking a moment to breathe, having a coffee before pressing 'buy', considering your options on a bike ride), your mental framework will provide you with the stability to allow detachment from your emotional response to trading situations, so that you are not responding in a knee-jerk manner.
If you can decide based on the present, rather than the loss you made yesterday or the big win the day before, then you can trade in a way that is free from stress and pressure.
Trading becomes about the love of the game, rather than the worry of loss.
Having a framework to prepare you for situations that are out of your control helps you to respond to situations, such as potentially damaging financial movements, news stories or banking actions, in a way that is not emotional, but not inhumanly robotic either.
Observing reactions, understanding that they are valid and normal, then living in the moment and making cleaner judgments is what mindful trading is about.
In trading, mindfulness allows you to accept the feelings you have – whether positive or negative, good or bad – and understand that they are all valid. Mindfulness enables sitting with them, allowing them to happen and then moving forward when you are ready.
Mindful traders can maintain an emotional equilibrium whether losing or winning, dealing with events completely out of their control or square on in the saddle.
If you are mindful, you can control your response to these events and avoid making poor judgments, self-sabotaging or acting out of overconfidence.
Focus helps mindful traders to process information logically and reasonably and helps maintain calm when under pressure.
Mindfulness is a practice that needs to become part of everyday life to become an instinctual, normal response when trading. Applying mindfulness in day-to-day activities helps with this.
Mindful traders can then enjoy the trade for the game, rather than the worry of money or the risk of losing.
WikiJob does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.