Although the practice of mindfulness would not at this point be considered to be a mainstream medical intervention in western countries, this certainly does not mean that there has not been an increasing amount of research into its potential benefits.  This has resulted in academic research programs and publications in peer reviewed journals.  The results are certainly encouraging so that a lot more attention is now being paid to how it can be used to treat disorders and improve daily functionality in itself, as distinct from a step on a path to enlightenment.

I’m not going into any in-depth review of this research here, but a review of academic scientific studies from a few years back concluded that there was evidence that mindfulness would help a range of people in varied situations[2].  The authors concluded that

Thus far, the literature seems to clearly slant toward support for basic hypotheses concerning the effects of mindfulness on mental and physical well-being. Mindfulness training may be an intervention with potential for helping many to learn to deal with chronic disease and stress. (page 40)

In the cautious language of academic journals, that’s a pretty good endorsement.  Unsurprisingly, business has not been slow to turn its attention to how it may be able to use mindfulness to improve employee performance.  Quite an impressive list of potential benefits have been identified.  For example, Michael Chaskalson’s book ‘The Mindful Workplace’ identified that employees who engaged in mindfulness exercises showed signs of:

·        improved attention, job performance, productivity and satisfaction;

·        reduced experience of psychological distress and neuroticism;

·        greater well-being and satisfaction;

·        increased blood flow with reduced blood pressure;

·        improved  social skills;

·        increased self-awareness;

·        higher success in achieving academic and personal goals;

·        greater awareness, understanding and acceptance of their emotions and quicker recovery from bad moods;

·        less frequent negative thoughts with improved self-esteem and reduced dependence on external validation;

·        reduced defensiveness and aggressiveness when threatened;

·        enhanced ability to manage internal thoughts and feelings and resist acting on impulse;

·        fewer hospital admissions for heart disease, cancer and infectious diseases; and

·        a reduction in addictive behaviors.

That’s quite a list and I’m not saying you will experience all these benefits, but the research appears to be pretty conclusive that introducing mindfulness programs to the workplace can improve concentration, awareness and objectivity among employees resulting in action rather than reaction and better calmness under pressure.  This is apart altogether from the general health benefits.  This conclusion has also been supported by leading business publications such as the Harvard Business Review, and here in Forbes. 

So, what about mindfulness and trading?  It has long been known that the psychological aspects of trading are just as important as technical analysis.  The writings of leading authors on trading, such as Alexander Elder and Van Tharp are good examples of the importance that must be attached to these issues.  Other authors have argued that in respect of the psychological requirements, trading is similar to competitive sports.  

Alexander Elder’s approach to trading is set out in the sub-title of Trading for a Living – Psychology, Trading Tactics and Money Management.  In effect he breaks trading down into 3 areas which he subsequently describes, respectively, as the 3Ms – mind, method and money.  To be successful, a trader must master skills in each of these areas.

It seems a very familiar approach to us today, but up to then, the focus of trading books had been overwhelmingly on method.  Look back at all the great authors on investing and trading up to that point and they had described in great detail either fundamental approaches to trading – Benjamin Graham for example – or technical analysis.  Sure some had noted the importance of risk control, and some heavy volumes existed on risk analysis, and some may have indicated that getting the mental state right was important.  Only Mark Douglas, who published just before Elder, really stands out for the private trader in this regard. 

What Trading for a Living did was that it put these 3 areas beside each other.  Each was equally important.  Indeed, on reading the book, one would consider that the importance may well be in the order the 3Ms are presented with method not really the primary concern.

There is no doubt that the publication of Trading for a Living was timely.  Markets were opening up to private traders through computers and regulatory change.  Elder realised that this effectively solved what were considered some of the greatest ‘how to trade’ problems facing private traders – how to access markets, how to get information, how to make the necessary calculations.  But as these were solved he realised that this meant individuals could trade, but that this did not mean they could trade well or profitably. 

The book sets out actionable rules for trading.  His rules on risk control (money in the 3Ms) are quite simple.  Never risk more than 2% of your fund on any trade, always have defined stops, manage the trade to reduce the open risk, and stop trading if you lose more than 6% of your fund in any month.  While the last may not suit all traders, there is not a lot to argue with here otherwise.

His method is heavily based on technical analysis and on what he calls the Triple Screen system.  This uses 3 timeframes.  The longest identifies the trend and thus the direction of the trade.  The next is used to identify pullbacks to give entry points.  The shortest timeframe is used to time the entry.  Again a very logical construct.  He shows which technical indicators are best to use and is particularly taken with the power of divergences when spotted on MACD.  His own Force Index, which combines price moves and volume, is now often included as a standard indicator in charting packages. 

Mind is a hugely important area in his books but is less amenable to simple rules, with routines and practices being the best approach.  A trader must know the market and must know himself.  He emphasises the potential for self-destructive behaviour.  The best way to avoid this is to have defined rules, defined ways to reach decisions and practices to ensure discipline such as keeping a comprehensive journal of trading and reviewing it.  The purpose of the journal is not just to see what is working but to ensure that you do what you are supposed to do and see the impact of deviations.

So, what about using mindfulness in this context?  One thing to remember about using mindfulness in a business context is that while it helps you to focus on a single objective and to concentrate on the tasks in hand, this is very different from being single minded about something.  And this is one of the great benefits when it comes to trading.  Why so?

It is very important in trading to have the single objective of making money.  That’s why you trade, there is no other reason.  If you trade primarily for the buzz or the enjoyment then you will probably lose money and there are far more enjoyable and exciting ways for you to spend money.  So you have a single objective that dominates all others.  However, you must never be single minded when trading.  Instead you must be very open minded i.e. open to any number of alternative concepts to the one you have adopted as your preferred conclusion.  An example will show you what I mean.

Let’s say you have done your analysis and concluded that the S&P500 stock index is going to rise.  For a trader who relies primarily on fundamental analysis it may be positive earnings announcements, an interest rate cut or a good consumer confidence index release.  If you prefer technical analysis it may be that the market has been in an uptrend and pulled back to a known support level.  You observe that the MACD signal line has crossed up and that the RSI oscillator has just moved out of the oversold area.  These are all good reasons to conclude that the market is likely to rise and your decision to go long is correct. 

The market opens and you go long the S&P keeping well within your risk parametres.  The market moves up on strong volume and an hour later pulls back in a normal manner towards support giving you a further opportunity to increase your stake.  You buy in.  All is going to plan.  Except that for no apparent reason the market does not bounce but moves down a bit further.  Nothing dramatic, but you are now a bit in the red.  There’s no obvious news, not that this fact will stop media commentators offering all sorts of ‘reasons why’ the market did what it did – traders took some profits, some CEO said something unexpected, risk in China, you’ve heard them all before.  Nothing to be greatly worried about. 

So you take the opportunity to increase your stake and as the market moves back towards a further support level you buy in again.  Then, for the rest of the day the market drifts lower continuing to ignore the obvious technical support levels.  Eventually your stops are hit and you take your losses.  Or worse, you hang on in and end up taking bigger losses a day or two later as the market falls further as big stops are hit.

What went wrong?  You start asking – why did the market do that?  But that’s the wrong question.  The market can and will do anything it wishes to do.  There is usually no foreseeable reason, and often no good reason at all. 

But what did you do?  You did good analysis and reached a reasonable conclusion.  Indeed, it is fair to say it was the correct conclusion based on the information that was available to you.  You trusted and followed your trading plan.  But the market neither knows nor cares what you did.  The mistake you made was to be single minded in your conclusion that the market would rise. 

The fact is that any conclusion you reach on the basis of analysis is probabilistic. The probability of being correct is only marginally better than 50% in terms of market direction, no matter how good your analysis.  You missed the most obvious piece of information: the market fell when you were expecting it to rise.  You were wrong in your expectations.  But your single minded pursuit of building a long position, which was based on what you knew in advance rather than what transpired, blinded you to this.  It’s the exact opposite of mindfulness, of being aware of the present.  The market gave you numerous opportunities to see that you were wrong – it broke through support levels, it did not react positively to good news and so on.  But you remained wedded to your initial conclusions and single minded, rather than open minded to the fact that you were almost as likely to be wrong as to be correct.  

Mark Douglas put this mindset very well in his excellent book ‘Trading in the Zone’ when he said that you must be rigid in your rules, but flexible in your expectations.  In other words, you follow the rules in undertaking the analysis and trading, but if the market does not do what you expect then you react to that rather than keeping to your initial conclusion.  However, he added, most traders do exactly the opposite.  They reach a conclusion, form an expectation and stick to that, in the process breaking their rules in order to justify staying with a trade that is no longer viable. 

Mindfulness will help you to break this very common adherence to prior conclusions and expectations by increasing your awareness of what is actually happening in the present rather than emphasising expectations about the future based on analysis undertaken in the past. 

I think the following paragraph from ‘Mindfulness in Plain English’ by Bhante Gunarantana captures mindful behaviour, as opposed to our usual learned way of thinking quite well:

Mindfulness is very much like what you see with your peripheral vision as opposed to the hard focus of normal or central vision. Yet this moment of soft, unfocused, awareness contains a very deep sort of knowing that is lost as soon as you focus your mind and objectify the object into a thing. In the process of ordinary perception, the mindfulness step is so fleeting as to be unobservable. We have developed the habit of squandering our attention on all the remaining steps, focusing on the perception, cognizing the perception, labelling it, and most of all, getting involved in a long string of symbolic thought about it. That original moment of mindfulness is rapidly passed over.

Compare this with what the trader in the paragraph above did.  The information that was provided by the market was seen, but not for what it was.  It was rationalised as support for a creation of the traders imagination – an expectation about the future. 

Notice two important concepts in the passage above in relation to mindfulness.  The first is that it is about awareness.  And that is where the introductory course will concentrate.  But the second is that mindfulness is only about this awareness.  It occurs before the logical mind kicks in.  So learning mindfulness is not just about trying to improve awareness, but also to develop the skill to leave it at that – not to explain or categorize or internalize whatever it is that we become aware of.  This contrasts with our usual practice of being aware of only a tiny subset of our sensory experience and then applying our intellectual facilities to this subset to reach conclusions of some sort, which may well be just figments of our imagination coloured by our prejudices and prior experiences.  And even if by some chance we are objective in our thinking we will have ignored so much else. 

Gunarantana goes on to say

Mindfulness is mirror-thought. It reflects only what is presently happening and in exactly the way it is happening. There are no biases. Mindfulness is nonjudgmental observation. It is that ability of the mind to observe without criticism. With this ability, one sees things without condemnation or judgment. One is surprised by nothing. One simply takes a balanced interest in things exactly as they are in their natural states. One does not decide and does not judge. One just observes.

Do you see the relevance to trading?  You must always trade what is, not what you want to be or what you want the market to do or what you imagine is happening.  Always remember that the flow of information is one way only: from the market to you.  Never the reverse.  You cannot influence it in any way by accepting, or refuting, what it is telling you.  You must simply accept it. 

The practice of doing so is a skill at the heart of mindfulness as captured by the following passage:

Mindfulness is an impartial watchfulness. It does not take sides. It does not get hung up in what is perceived. It just perceives. Mindfulness does not get infatuated with good mental states. It does not try to sidestep bad mental states. There is no clinging to the pleasant, no fleeing from the unpleasant.  Mindfulness treats all experiences equally, all thoughts equally, all feelings equally. Nothing is suppressed. Nothing is repressed. Mindfulness does not play favourites.

It’s not a big step from this to say that if you are practicing mindfulness in your trading then it is much the same thing in terms of its emotional impact for your mind to accept that you are wrong, and prompt you to act appropriately, as to accept that you are right.  This is a long way from most traders’ experiences.