The true key to trader psychology: mindfulness


Mindfulness is a mental skill that is particularly valuable for traders who want to improve their trading psychology.

Over the last decade, science has shown that mindfulness can be good for physical well-being and mental health. The practice of mindfulness reduces anxiety and stress, decreases the heartbeat rate, lowers blood pressure and improves the functioning of the immune system. It also improves concentration, helps people to have a better self-awareness and promotes a better understanding of the environment by taking a step back from the constant mental and emotional chatter that interprets the events that occur in order to process them in a more objective way.

Mindfulness is used in sports, companies and the US Army

Mindfulness isn't a weird "New Age" trend. The Seattle Seahawks regularly use mindfulness to concentrate before training and games, and Phil Jackson taught mindfulness to his basketball teams, noting that this was part of the recipe that had earned him 11 NBA awards.

The business world has also embraced mindfulness. Google, Target, General Mills and Aetna (for example) have all started to apply mindfulness in their workplace on a daily basis. Even Wall Street companies such as Goldman Sachs, BlackRock and Bank of America have embraced mindfulness to help reduce stress among their employees and improve decision-making.

Aetna analysed the results of the mindfulness programmes it offers to its 60,000 employees: stress was reduced by 27%, sleep quality improved by 21% and productivity increased by 61 minutes each week.

Even the US military has become interested in mindfulness. A group of soldiers who were about to be deployed in the Middle East was trained in a mindfulness exercise designed to be used in real time and in highly stressful military situations. The results were positive, showing less overall stress, better adaptation, better focus in stressful situations, and a quicker return to normal after experiencing highly stressful situations. Soldiers who had not received mindfulness training requested it at the end of the study.

What is mindfulness?

Mindfulness is a mental ability that promotes an open and active state of attention in the present moment. The person observes his thoughts and feelings as if he were a coach watching his best player to observe his performance without judgment, but taking note of how to improve it. Mindfulness focuses on being truly alert and focused on the present moment, rather than living life through memories of past events or planning for the future. Research shows that no matter what task we do, our mind is focused on this task only half of the time. Mindfulness helps us focus our wandering and random mind.

Mindfulness and trading

Mindfulness is easily adaptable to financial market trading. Like athletes, corporate employees and soldiers, traders who practice mindfulness find their minds clearer and more focused on the present. They realise that they are better able to read the market when they practice mindfulness, less likely to make hasty decisions, and less likely to feel cognitive biases. They also find that mindfulness is invaluable for overcoming the destructive trading that occurs in response to negative emotions such as fear, greed, and anger, which have an averse affect on performance.

Mindfulness helps one overcome an aversion to losses

One of the biggest psychological barriers to successful trading is our natural tendency for an aversion to losses. Losses affect us greatly and can cause a variety of negative behaviours that can significantly affect our performance.

Loss aversion often causes the following disastrous practices:

  • Early closure of profitable trades;
  • Hesitation to open positions on the basis of informed trading signals;
  • Keeping losing positions open too long;
  • Doubling losing positions (Martingale strategy);
  • Doubling the size of a position to compensate for previous losses;
  • Not using a stop loss;
  • Moving the stops of losing trades.

Mindfulness is a powerful antidote to an aversion to losses.

Research shows that the location of fear in the brain, the amygdala, is activated when a trader is under the agonising effect of loss aversion. Researchers have observed how this region of the brain is affected when study participants are in market trading situations and loss aversion is activated. Other research has shown that the amygdala is reduced in size and attenuates its functioning after a brief period of mindfulness. This helps to explain why mindfulness is so effective in combating fear, anxiety and stress and why it has become the cornerstone of treatment in clinical programs dealing with these issues.

If there is a key mental skill that all traders should try to develop, it's mindfulness. Fortunately, it's easy to learn. Many resources are available on the internet.