Thursday, September 26, 2019

A Simple Technique for Overcoming Reactive Trading

In my recent podcast with Optimus Futures, I talk about the relevance of psychology to trading for both developing and experienced traders.  Many of the best traders are highly competitive.  Their drive to win can drive them to make decisions based upon the need for P/L and not because of what is actually happening in markets.  Instead of trading proactively, they can find themselves making decisions that are reactive to the latest market move.  Such reactive trading, over time, is rarely profitable trading.

In the Radical Renewal blog book, I make the point that music or speech would be incoherent without pauses.  If we strung together word after word with no pauses whatsoever, our speech would turn into noise.  Similarly, if we make one decision after another without pause, our behavior becomes random.  It is during pauses that we can reflect, and it is reflection that enables us to make sense of markets and adapt our trading accordingly.

One simple technique for overcoming reactive trading is something I did with the traders I worked with in Chicago.  They set alarms every 20-40 minutes through the trading day, with the understanding that, as soon as possible after the alarm, they had to pause and fill out a brief checklist.  The form simply asked them to rate their emotional state (calm or worked up) and their cognitive state (focused or distracted).  The act of checking the scales on the questionnaire required them to become mindful of their state.  It was an act of self-awareness.

If the trader found that they were distracted, emotional, and not in their proper zone, they took a few minutes away from the screens, engaging in deep, slow breathing and visualizing something peaceful and calming.  Once they felt centered, they could return to following markets--until the next alarm.

What this accomplished was quite important:  It turned mindfulness into a daily habitOver time, the traders realized that they were more at risk missing opportunity because of being in the wrong mindset than being temporarily away from screens.  Once they realized that their mindset would sabotage their trading, their FOMO led them to do the right things to get calm and focused!

One way to view the situation is that, if you're not training yourself to sustain mindfulness, then you're actually reinforcing mindlessness.  The simple alarm can wake us up to put ourselves in the right state for success.

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