In part 1 of this article I looked at the likely causes of inability to adapt to changing market conditions. In part 2, I propose some practical solutions.
We need to be fully alert and focused if we are to have any hope of competing successfully in the fast, furious and ever changing financial market place.
Training and conditioning our mind to operate effectively in noisy market conditions is perhaps one of the most important things a trader can do to enhance their trading skills.
What we are aiming for is to develop our awareness and the ability to engage both system 1 and system 2 thinking harmoniously and simultaneously under difficult and challenging conditions. This involves another important part of our brain, the pre frontal cortex, more commonly known as the executive function.
Alertness is important! It affects areas like higher order reasoning, learning and problem solving. At the right level of alertness, people often experience a feeling commonly described as being “in the zone.”
There is no single best way to go about developing these mental skills or attaining these optimal mind states.
Most types of interventions, no matter how bizarre, seem to work for someone, some of the time but nothing seems to work for everybody all of the time. Start with techniques that have been properly tested and found to be useful and from there, experiment and find out what works best for you.
Here are a few suggestions to get started:
Preparation for Trading
We live in an overstimulated world where a myriad of things constantly compete for our attention and awareness. Claiming all your attention back in preparation for you trading session may give you a much needed mental edge. There are many things you can do that may help such as
Take a warm shower or relaxing bath prior to your trading session
Wander in the garden or go for a nature walk
Listen to some calming music
Turn off your mobile phone, the television and anything else that will distract you.
Pet your cat or dog.
Drink a cup of herbal or green tea.
Your Trading Space
Your trading space and time need to be quiet and free from interruptions and distraction so that you can fully focus your attention on the difficult trading task at hand. You can’t avoid dealing with market noise, but a least give yourself a chance by reducing ambient noise to a minimum.
There is large amount of research indicating that regular meditation practice has many beneficial effects on the mind. If you chose to go down this path you will probably need to do some careful investigation to find out which mediation method is most suitable and works best for you. Remember… your objective is to improve your traders mind, not obtain nirvana.
For those who don’t want to go down the formal meditation path, the practice of mindfulness is an alternative. Mindfulness is closely linked to meditation; you can practise it throughout the day almost anywhere, or any time. It can be as effective as a more formal meditation practice.
Focus completely on what you’re doing and observe all the physical and emotional sensations you experience in that moment. A difficulty is remembering to do it on a regular basis. This practice can seem a little strange at first but with a little effort soon becomes second nature.
Breathing, apart from its obvious essential function for staying alive, plays a part in many mediation practices. Most people have a tendency to shallow breath. Deep abdominal or diaphragmatic breathing activates your body’s parasympathetic nervous system (aka your relaxation response), relaxes your body, slows your mind down and increases alertness. Deep, slow breathing can incorporated into your mindfulness practice.
Exercise is not only good for the body. It also helps you develop and maintain a healthy brain. There is a vast and growing amount of research on this topic. Do some googling for more information or simply take a light jog or go for a walk.
The part of your brain responsible for system 2 thinking, including that ever important executive function, consumes a huge amount of nutritional products for its size. Fruit, either fresh or dried, provides essential glucose for your brain. A 250ml glass of water hydrates the brain and gets glucose and oxygen to it faster.If you feed your brain on junk food expect to get junk thinking along with junk trading results.
Both your mind & body require sufficient rest and sleep to rejuvenate. The frenetic pace that many of us live our lives at takes a savage toll of our energy. Try and arrange your trading sessions around times when you are fresh and alert; not when you can hardly keep your eyes open.
Multitasking is often unavoidable during our busy lives: don’t do it during your trading session. Focus on one task at a time, give your full, undivided attention and do it well.
When trading, just trade.
Online searches suggest that games like Sudoku, crossword puzzles and various online offerings will increase awareness and help develop that ever important executive function. Some claims are unsubstantiated, but there does appear to be some evidence that certain types of games could be useful. One thing that interests me with these game based approaches is just how well the mental skills they develop transfer to trading.
Here is a link to a free online game that utilises a well-known and well researched effect known as the Stroop effect. This is definitely worth a look if only to illustrate how challenging, thinking in a “noisy” environment can be.
Another website that is worth a look is BrainHQ. They have taken the trouble to have independent researchers test the validity of their games and claims. Check out the attention exercises. This is a paid service with a modest monthly or annual subscription that may put some people off but compared to the amount of money people can lose on trading, the cost is trivial. The link is https://www.brainhq.com/ – (I have no vested interest in this organisation)
To find high probability trading opportunities we need to look for strong trends with relatively low volatility. Any cyclic movement should support the direction of the trend, at least initially For longer duration trades the cyclic component can be expected to reverse direction on numerous occasions throughout the trade.
While experienced traders may be able to see these characteristics just by looking at a chart, the less experienced trader is probably well advised to use measurement. Precision measurement and sophisticated techniques are not necessary but without some form of quantifiable analysis the less experienced trader is likely to find their judgement being overrun by the effects of randomness, particularly during market disruptions and change.
Most people who drive a car have had the experience of going from point A to B and on arriving at their destination, have no recollection of the journey. They were driving using their unconscious system 1 autopilot. In many situations, system 1 thinking will happily take over and do a good enough job, but if we are driving on autopilot in unfamiliar territory, we are very likely to miss that all important turn.
In the same way, over reliance on system 1 thinking when trading can cause us to miss or misinterpret important changes in the market.
We need to develop and engage our system 2 thinking together with the executive function and appropriate trading analytical techniques to cut through the noise and confusion.