Trading Psychology Edge

This is a tran­script of an inter­view I did recently with Tim Bourquin of Traders Interviews.

My guest today is Dr. Gary Day­ton. He’s here to talk to us about “mind­ful­ness” and how that can help us as traders to make bet­ter deci­sions in the mar­ket. Dr. Day­ton, first of all, what is mindfulness?

Well, Tim, mind­ful­ness is a qual­ity of atten­tion. It’s pay­ing atten­tion on pur­pose in the present moment with­out judgment.

We typ­i­cally are fre­quent fly­ers into the past or off to the future, and we tend to eval­u­ate every­thing that comes into our aware­ness as either good or bad; “Do I like this, do I not like this?” Those are con­di­tioned ways of think­ing, or habit­ual ways of think­ing, that are not nec­es­sar­ily help­ful to the trader.

Mind­ful­ness does a num­ber of pos­i­tive things, and in fact, the recent research is show­ing that it is actu­ally alter­ing brain struc­ture in ways that can be very use­ful for the trader.

Prac­tic­ing mind­ful­ness just 30 min­utes a day over a cou­ple of months will affect the cen­ters of mem­ory and learn­ing, the emo­tional reg­u­la­tion cen­ters of the brain, even things like per­spec­tive tak­ing, all of which are impor­tant to traders and are pos­i­tively influ­enced by mindfulness.

The prac­tice of mind­ful­ness can also help us to increase our focus and our con­cen­tra­tion. Ath­letes often refer to this as being “in the zone.” It’s a qual­ity of con­scious­ness where time seems to slow down, dis­tract­ing thoughts and feel­ings fall to the way­side, the com­plex pat­terns of the mar­ket become clearer, trad­ing cues become clearer, and our entries and our exits become sharper, all by mind­ful practice.

How do I actu­ally put that into prac­tice on a daily basis? What am I actu­ally doing each day? Is it 30 min­utes before the mar­ket opens?

That’s a help­ful thing to prac­tice mind­ful­ness for­mally, but you can do it infor­mally as well.

When prac­tic­ing mind­ful­ness infor­mally, just notice when your mind wan­ders.  For exam­ple, if you are talk­ing with some­body and they are speak­ing, notice how much your mind gets dis­tracted from what they are say­ing.  We all have this expe­ri­ence where we’re for­mu­lat­ing our answer before the other per­son is even fin­ished talk­ing. Notice that. Pause, refo­cus on the task at hand, which is talk­ing to the other per­son, lis­ten­ing and being atten­tive to them.

Set aside an hour a day dur­ing your nor­mal course of activ­i­ties and be mind­ful.  Dur­ing this hour, your goal is to notice each time your mind wan­ders, becomes dis­tracted, and you get lost in thought.  If you have never done this before, I guar­an­tee you will be aston­ished at how eas­ily dis­tracted you become.

More for­mally, you can sit for five min­utes to start in a quiet area.  The task is to watch your breath.  Place your atten­tion fully on the breath as it comes in and as it goes out.  Keep your atten­tion on your breath.  Notice when your mind starts to wander…and it will, fre­quently. It’s what the mind does, and that’s per­fectly nor­mal. The goal of mind­ful­ness is to become aware of when your mind becomes dis­tracted, and then gen­tly bring the mind back to the task at hand, which in watch­ing the breath is the breath.

So it sounds like this is all about stay­ing focused on the charts and the mar­kets while the mar­ket is open and try­ing to keep those thoughts about what’s going to hap­pen after the mar­ket closes or what’s been going on in our lives out­side of that so that we can actu­ally make bet­ter decisions.

Exactly.  You know, trad­ing is stress­ful. We’re deal­ing with risk and uncer­tainty and the fear­ful feel­ings that we have and the fear­ful thoughts that arise cause stress and that’s uncom­fort­able. So nat­u­rally, We want to get rid of those stress­ful thoughts and feel­ings.  But it is that desire to escape the feel­ings that tends to shift our focus away from the mar­ket and onto our fear­ful thoughts and emo­tions.  It’s a para­dox: the more we don’t want fear and stress, the more we have it and the worse it becomes.

Prac­tic­ing mind­ful­ness helps us step out­side of our thoughts and feel­ings and see them for exactly what they are: tem­po­rary thoughts and feel­ings that soon go away, noth­ing more.  Hav­ing even very fear­ful thoughts when mind­ful allows us to have those thoughts and feel­ings know­ing that they are pass­ing men­tal events and allows us to focus on the mar­ket and trade from our core, not from what’s going on in the mind.

And mind­ful­ness is a skill, and so it takes prac­tice.  We can’t just do it once or twice and be expert at it.  Any worth­while skill requires effort, and this is very true of men­tal skills like mindfulness.

As we said last night, the activ­ity in the stock mar­ket should pick up today and we are see­ing that com­ing into the US open.  Volatil­ity is increasing.

Volatil­ity Increases

The Weis Wave shows buy­ers in good con­trol of the mar­ket.  Vol­ume is clearly com­ing into the upside.  We are com­ing into a struc­ture sup­ply point here, so we will see how the mar­ket responds to it.  There is news due shortly this morn­ing, too.  This could change the game, and the Weis Wave will pick that up quickly enough if it does.  But right now, buy­ers are dom­i­nant.  Key lev­els of sup­port now are 1292 — 1289 (highs of last two days) and, of course, 1283.50, which now becomes our line in the sand.

Again we see the stock mar­ket dip down and then rally back up to close firm.  I men­tioned last night that the cur­rent mar­ket action is look­ing like likely absorp­tion.  It looks even more like absorp­tion behav­ior after today’s action.

Ranges have nar­rowed, but you can see that the S&Ps have not given up any ground for the past five days.

If the absorp­tion is suc­cess­ful, we will see the stock mar­ket rally up and over the 1283.50 high put in on Octo­ber 27th.  We are only a hand­ful of points away from that level.

Today’s range was fairly nar­row and also inside yesterday’s range.  We can antic­i­pate that the mar­ket will move out of this area soon.  Day traders get pre­pared!  Watch for trend day con­di­tions when it does.

Last week, the S&Ps held just below the 1283.50 high put in dur­ing late Octo­ber.  On Fri­day, we pushed up briefly over Tuesday’s 1280 high, but couldn’t hold it.  But, we didn’t sell off hard on the reac­tion.  I view this as likely absorp­tion of the resid­ual sup­ply from the sharp August sell-off.

Vol­ume was light, how­ever.  You can see this on the weekly chart best.  In part, this is due to the short­ened hol­i­day week.  But we do want to see vol­ume pick up soon, oth­er­wise we can see a reac­tion set in.

Any reac­tion should not come as a sur­prise.  We are in the early part of the month, which tends to see the most pull­backs.  If we do get a reac­tion, I would antic­i­pate it not going below the 1250–1245 level.  In fact, if we did see a reac­tion come down around that area, it could set the mar­ket up for a very strong push up and through the cur­rent resistance.

If we con­tinue to hold gains and absorp­tion plays itself out, then look for a drive up and through 1283.50 next week.  We will want to see good vol­ume come in to con­firm any drive up.  If this lat­ter sce­nario occurs, we can see price push up to the 1350 area over the com­ing weeks before becom­ing overbought.

Happy New Year!

Happy New Year to all our read­ers!  Helen and I (and Asta, too!) are back from hol­i­day.  We had a great time spend­ing Christ­mas Week and New Year’s in north­ern New Eng­land.  It is a won­der­ful place to enjoy the hol­i­day season.

Rally from Spring — No Sellers

The mar­ket has not given up any ground since mid-December.  Keep in mind that it was a Spring that ignited this rally, and these can be very pow­er­ful setups.  Why so pow­er­ful?  Well, because lower prices get rejected.  It is a clear sign that sell­ers have no strength and that buy­ers can step in and take control.

And, we con­tinue to see buy­ers in con­trol.  The dips down in Novem­ber and mid-December failed to bring out sellers.

Push­ing Above Resistance

Mar­ket Push­ing Higher

We have seen tonight’s chart before.  The long upper box high­lights the resis­tance area that stretches from the June lows through the highs in Octo­ber, Novem­ber and the end of Decem­ber — six months of mar­ket struc­ture.  Presently, the mar­ket is attempt­ing to push up above this resis­tance band.

On the first day of trad­ing for 2012, the mar­ket gapped up and over the resis­tance band.  Today, it came back down and tested it, find­ing no sell­ers to drag it back down.

What’s next?

The imme­di­ate key level is yesterday’s high at 1280 and the Octo­ber 27th high of 1283.50.   The mar­ket must sur­mount this area in order to con­tinue to rally higher.  Push­ing above this level would pave the way for the mar­ket to test last year’s highs and per­haps make new highs over last year.  We shall see.

The Hol­i­day Sea­son is here, and Helen and I (and Asta, too) will be tak­ing a break going north for some ski­ing and snow­shoe­ing.  We would like to take a moment and thank every­one in our lit­tle com­mu­nity for all your sup­port and encour­age­ment over the past year.  We wish you and yours a very mem­o­rable hol­i­day sea­son!  We’ll see you again in the New Year!