Proven Methods & Techniques for Mental State Control

• Most traders, when asked what trading discipline is, will answer that it is all about cutting your losses short and not risking too much of your account on any given trade. i.e. They equate discipline with good risk management. While this is certainly a key part of discipline, it is by no means an exhaustive description. And it’s also the part of discipline that should be a given if you’re at all serious about trading. You should respect the market far too much to do risky things.


• So then, what is discipline? Our definition is that trading discipline is the ability to control your state of mind to allow for optimal trading performance. This definition does not limit discipline to certain behaviors. Rather, it’s an internal state of mind that consistently produces correct trading behavior. And the correct trading behaviors which fall under this realm of discipline are not limited to correct risk management. In fact, here are some other effects of having weak discipline, showing that discipline extends to every aspect of trading:


o Overtrading: Letting frustration, lack of patience, or anger, allow you to take too many trades, get chopped up by the market, trade in places and at times you shouldn’t be trading, and take trades that are not part of your strategy or trading plan.


o Under-optimizing exits: Letting fear and doubt allow you to not hold the trade to your target, scale out too often and too quickly, and consistently take small profits.


o Skipping trades after a string of losers: Letting lack of confidence and fear allow you to skip perfectly good trades that could make up for some or all of your losses, thereby degrading the long-term edge of your strategy.


o Failing to aggressively capitalize on good conditions: Letting yourself be complacent, satisfied, and fearful of losing profits, thereby not accepting good risks during high conviction days and greatly under-optimizing their profit potential.


o Stopping trading once you’re up a certain amount: Letting the gratification of booking a profitable day and the fear of losing profits allow you to stop prematurely even when conditions are conducive to further profits.


• In all of these mistakes, the trader focuses on their profits & losses for the day, instead of focusing on correct trading process. He or she allows their negative state of mind to control their trading behaviors. Even when such a thing doesn’t lead to outright losses, missed or under-optimized opportunities end up greatly degrading the bottom-line results. Discipline is all about consistent mental state control to achieve to as close to optimal trading performance as possible. Given two equal traders in terms of strategy and skill, the one with the better and more consistent mental state control is the one with more discipline, and he or she will be the one that will make more money.

• There are various techniques for controlling your state of mind, and this is really the flip side of the coin to handling emotions. Your thoughts cause your emotions, and how you handle your emotions affects your thoughts. So it’s all intertwined and interrelated. The first technique is Cognitive Reframing, and to understand what this technique is all about, you have to first understand the nature of reality.

• What you view as reality is simply a product of your interpretation based on your beliefs and experiences. This creates your frame of reference, and your frame of reference is your reality. There is no objective reality “out there”. Rather, each person’s reality is a product of their state of mind and their frame of reference. And this frame of reference not only determines how we view the world, but it literally shapes our lives and what happens “to” us. Based on our beliefs and thoughts, we act in certain ways, and given a different set of beliefs and thoughts in the same situation, we would act in different ways and cause a whole new sequence of events in our life that can dramatically change our path and everything that happens. Our minds literally create our realities. We are not victims of chance or circumstance.

• All of this points to one simple, yet powerful conclusion. You are responsible for your life, and if you can change your mind and thoughts, you can change your reality. It’s a matter of choice, and all that is needed is to take 100% responsibility for it. Make that commitment now to take 100% responsibility for creating the reality that you want in trading and in life.

• Technique #1: Cognitive Reframing. This simply means to change your frame of reference by ascribing different meaning to something or looking at it from a different perspective. Here are some trading examples:

o You take a loss on a trade that you shouldn’t have taken:

I am a bad trader. That was so stupid. → I can’t learn if I don’t make mistakes.

o You take a loss as part of your strategy: 

The market is out to get me. → This is a game of odds and losses are a natural part
of my edge.

o You take a string of losers in a row: I have lost my trading ability. I can't make money anymore.
→ Any good strategy will have strings of losers and this is to be expected even when I’m doing the right things.

o You miss a great trade that you should have caught: I am such an idiot. A good trader would have not missed that trade. → Even good traders make mistakes and what defines a trader is how well they bounce back from mistakes.

• Through cognitive reframing, you can take something that would normally be a negative thing, and
flip it completely around so that not only does the negative aspect get taken away, but it becomes a total positive. The key is to continually monitor your self-talk and any time you find it slipping towards something negative, even if that comes in the form of an innocent question (eg. how could this have happened?), to look for the positive within it and focus on that. A mistake can be turned into an mpowering challenge. A loss into pride for following the rules correctly. And so on.

• To help you with cognitive reframing, make sure to practice what you learned about handling emotions. The negative thoughts are often so quick and automatic that by the time you notice them the feelings they cause may already be overwhelming you. So to even be able to reframe it, you may need to quickly deal with the emotions first. Often the strong emotion coupled with the intensity of the situation will cause you to feel apathetic. i.e. You’ll notice your negative thoughts but you won’t even want to do something about them because you get into the “I don’t care attitude”. This is normal and is simply a form of resistance. The way to get through it is to welcome it instead of fighting it, as unnatural as that may feel. Usually it’ll quickly dissipate and you’ll once again have the will and desire to change your state of mind.

• As an important side note, always finding the positive in any situation does not mean ignoring the lessons that your mistakes and losses can offer you. You should be learning from everything and not being blindly and naively positive. You should always be looking to push yourself to get better and find weaknesses in your trading. But those things are best suited for after market hours. During the trading day, your goal and priority should be to stay in an optimal state of mind- not to critique and pick apart your trading. You can jot down quick notes during the day, but keep your focus on staying positive and maintaining your state of mind. That is what will serve you best when you’re actually trading.

Posted by Victor Lew

Tweet