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5. Mindset Over Matter

Your trading mindset

“It is our attitude toward events, not events themselves, which we can control. Nothing is by its own nature calamitous — even death is terrible only if we fear it.”

— Epictetus

Your mindset is a collection of your beliefs, perceptions and rules. It reflects how you think about yourself, the world and others. It also shapes how you think about things. In trading, your mindset will define (and be defined by) how you think about vital factors such as the markets, risk, uncertainty, money, winning, losing and mistakes.

The role of mindset in your trading experience

Your mindset develops from birth and is influenced by the experiences and environments you encounter. It’s affected by your family, schooling, life, friendship groups, sports and hobbies, further education and work. From the moment you start reading about trading, learning how to trade, or getting exposed to the markets – your trading mindset is developing.

Key events and people, both positive and negative, can play a significant role in shaping your mindset for the better. A financial crisis, a tough period of drawdown – as much as a winning run, a respected colleague or a good coach or mentor – can all help you develop beliefs and perceptions that support your best trading performance.

But while some aspects of your mindset will be helpful, others will be unhelpful, taking you away from the trading actions required for maximising your chances of success.

One of the aspects of becoming a bulletproof trader is developing a mindset that supports successful trading. This is something that will surface throughout the book, but the focus here is mainly on our mindset and its approach to stress and setbacks.

How you think about stress – and the challenges, setbacks, losses and mistakes that give rise to it – will profoundly impact your experience and success in the markets.

Getting good at stress

Health psychologist Kelly McGonigal writes in her book The Upside of Stress about the importance of getting good at stress rather than avoiding it.9 She cites some interesting research which looked at people’s perception of stress and its impact on their health. The study asked 28,000 adults over an eight-year period to rate their perceived levels of stress over the previous year, whether they believed stress was harmful or not, and what actions they took to control their stress.

People who had experienced high stress and who also believed that stress had affected their health had a 43% increased chance of premature death.

By contrast, people who had stated they had experienced high levels of stress but that stress was not harmful to their health had the lowest risk of dying, even lower than those who had low stress but believed their stress was harmful.

The key outcome from this research challenges the belief that it is stress per se that is bad for us. That doesn’t seem to be the case. Nor is it the amount of stress that causes problems to our health. Rather, it is our belief about whether stress is harmful or not – what our perception of stress is.

It is our mindset about stress that matters most.

In another study reported in the book, people were put through two stressful situations: a five-minute videotaped speech on their personal weaknesses in front of a panel trained to actively unsettle them, followed by a maths test where they had to count backwards from 996 in sevens, again in front of a panel who provided unsettling feedback.

Before the tests, some people in the study group were told that the feelings of stress in such situations, and the physical responses they might experience (e.g. increased heart rate and quicker breathing), would be helpful. They were your body’s way of preparing you for the challenge at hand, enabling you to perform at your best. As a result of this instruction these participants performed more effectively and with a lower level of stress, compared to those members of the study who were told that the feelings and sensations of stress in such a situation were harmful to performance.

It appears that what we think about stress has more impact on our bodies, our health, and on our performance than the actual stress itself. With this in mind, one of the most important strategies for managing your trading stress is to change how you think about it.

Traders need to see that stress is both normal and – importantly – can be helpful. This reduces the impact of stress on your health in the long term (chronic stress), and may also increase your trading performance in the short term (acute stress).

Two steps to developing a performance-enhancing mindset around stress are:

1 Accept the inherent stresses of trading the market.

2 See the stress response as helpful and performance-enhancing.

Losses, mistakes and setbacks

What is your mindset around losing, failure and mistakes?

In his book Black Box Thinking, which examines the role that failure plays in success, Matthew Syed contrasts the culture surrounding mistakes and failure in the medicine and aviation industries.10

In medicine he finds there has historically been a negative culture around mistakes, with low reporting levels, influenced perhaps by the motivation to avoid being sued for medical negligence. The outcome of this culture is that mistakes are made but people don’t learn from them. So the same mistakes are repeated and performance doesn’t improve.

By contrast, he finds a much more open culture around mistakes in aviation. Here mistakes are reported and shared, not just within airlines, but across different airlines around the world, allowing a pervasive learning from those mistakes. Everybody can benefit – and safety levels and performance are improved across the industry.

What is your own internal culture around mistakes? Around losses, setbacks and difficulty?

Ray Dalio of Bridgewater Capital strongly believes that learning from mistakes is essential to improvement and ultimate success.11 He suggests that each mistake, if recognised and acted on, provides an opportunity for improving your trading. Traders can benefit from writing down the mistake, the implied lesson and the intended change (if required) to their trading process. This log can then be reviewed for reinforcement. Trading mistakes cannot be completely avoided – but repeating the same mistake can be.

Developing a mindset that enables you to see mistakes, setbacks and losses as opportunities to develop as a trader can be very helpful in helping you to manage them more effectively.

The Stoics were strong believers that challenges and setbacks were a part of life and important opportunities for self-improvement. Their philosophy developed a mindset that saw adversity as an advantage, and obstacles as the way.

“Our actions may be impeded, but there can be no impeding our intentions or dispositions. Because we can accommodate and adapt. The mind adapts and converts to its own purpose the obstacle for our acting. The impediment to action advances action. What stands in the way becomes the way.”

— Marcus Aurelius

This same mindset can be very helpful for traders.

A three-step process for managing and learning from your trading losses, mistakes and setbacks could be:

1 See losses, mistakes and setbacks as opportunities to learn.

2 Write down how you are thinking and feeling about a given loss/mistake/setback.

3 Write down the lesson(s) from the loss/mistake/setback and any action you will take as a result in the future.

A worthy rival

When I worked as a sports psychology coach, I encountered some athletes who developed anxieties about facing a certain opponent; often one who was more highly ranked or regarded as a better performer, more likely to win.

Some of these athletes became truly fearful of facing these opponents. They tried to avoid it at all costs. In the short term this avoidance of the opponent reduced their anxieties. But in the long term they lost out on the opportunity to play better opponents, to develop and raise their own game, and become a better performer.

In order to help these athletes I encouraged a mindset shift from fearing playing tougher opponents to actively seeking them out. I would remind them of the meaning of the word competition. In its Latin root it comes from a combination of com meaning ‘together’, and petere meaning ‘to seek’ – giving an original meaning of ‘to seek together’.

There was no element of winning or losing.

I helped them build a mindset that appreciated that competitive encounters were opportunities for the players involved to ‘seek together’ – to find ways of developing and becoming better at their craft, at managing their minds and honing their bodies. The best opportunities to do so were when your competitor was a tough one, a better player, someone who would test you; someone you would train hard to prepare for, and who would create opportunities for you to develop your game.

These opponents were worthy rivals.

Having a worthy rival, someone who can help you to bring out the best in yourself, is a great advantage to anyone looking to maximise their performance potential.

Difficult moments in the market should be seen the same way as facing a difficult opponent in a sporting event. It could be something to fear and avoid – or it could be a worthy rival, an opportunity to test yourself, for development and for growth that will ultimately contribute towards becoming your best trading self.

“When a challenge confronts you, remember that God is matching you with a younger sparring partner, as would a physical trainer. Why? Becoming an Olympian takes sweat! I think no one has a better challenge than yours, if only you would use it like an athlete would that younger sparring partner.”

— Epictetus

Developing a bulletproof mindset

By shifting your mindset from seeing stress as harmful, to seeing stress as normal and helpful – by seeing losses, setbacks and challenges as opportunities to learn from, develop and refine your trading process – you can shift your experience of, and relationship with, challenge and difficulty in the markets.

Difficult experiences can be seen as worthy rivals, sent to help you improve and build towards mastery over the long term.

What beliefs about stress, difficulty and challenge – about risk, uncertainty, losing, mistakes, drawdowns – would be useful for you to hold as a trader?

9 The Upside of Stress: Why Stress is Good for You (And How to Get Good at it); Kelly McGonigal, Penguin/Random House, 2015.

10 Black Box Thinking: The Surprising Truth About Success; Matthew Syed, John Murray, 2015.

11 Principles: Life And Work; Ray Dalio, Simon & Schuster, 2017.