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Finding Your Best Mental State for Trading

One of the most important skills a professional trader needs to develop is being able to manage his or her psychological state. Effective psychological maintenance can make all the difference between trading success and failure.

The Zero-State

In my own trading, I have found the essential state of mind I must be in to trade at an optimal level. I call it the “zero-state.”

For me, the zero-state represents an emotionally neutral condition that is neither happy nor sad, neither overconfident nor fearful. The adjective “calm” starts to come close to what I mean but the term lacks an important distinction. “Calm” is part of an adjective pair, whose partner has precisely the opposite meaning. “Stormy” is usually given as the antonym to "calm."

The term "serenity" describes a state that comes even closer to describing the zero-state than calm. Serenity suggests a timeless eternity of “no-emotion,” where I am not connected to the outcome in a personal, meaningful way.

No conventional adjective, however, can fully describe the zero-state. An adjective describes a particular condition. I associate one adjective or condition as one half of a pair of opposites. Both words of the pair form poles on a continuum where I think of the exact center as “zero,” just as on a number line.

Conceptually, the Japanese term “mu” comes fairly close to this concept of center. "Mu" has been variously described as neither yes or no, a state in-between that does not acknowledge the question being asked as one that may be answered by either yes or no, with the answer existing in a different plane of reality.

Other Useful Mental States

Other traders I know have found different mental states useful. After all, trading from an emotion-free state (like the zero-state) may not be the best mental state for you. Consider the following options for your optimal mental state in your journey of self discovery and trading mastery.

I know traders who find it necessary and useful to achieve a state of emotional alpha male competitiveness in order to enter the “ring of combat.” These traders perceive the trading environment as combative and they interpret their role accordingly. They anticipate combat, they mentally prepare for it, and they experience trading in combative terms.

Another effective trader I know needs to see himself as a pure mechanical businessman, so he takes a different approach: that of disinterested observer. He remains so disinterested that he will not even watch the trades unfold lest he’s tempted to adapt his rules mid-trade.

His analysis showed that such behavior did not add value, so his optimal mental state was to be as far away from engagement as possible.

These are just two other examples of different mental states suitable for effective trading. There may be as many unique states as there are traders, which means that you must use introspection and self-knowledge to discover what works for you psychologically.

How will you know? Know thyself and consult with others you trust and respect. Above all else, however, make sure you trade with real money in very small position sizes. Doing so will help you assess the effects of market, system, money and self on your total trading performance. Without even a small amount of money on the line, you postpone the Day of Judgment. The sooner you get into the game, the sooner you will engage in real learning. In addition, you need to use trading strategies that suit your personality, time frame, risk profile and working hypothesis of market behavior. Trading in ways that fit you will help you maintain your optimal mental state for trading.

Now, let’s delve into my preferred state for effective trading—the zero-state.

The Zero-State Experience

For me, achieving the zero-state is a necessary precondition for trading at my peak. It is a place where adjective pairs of mental states cancel each other out, leaving only a moment of pure being. It is the space between the words that we know, a moment and a place of freedom, where all notes may be struck; the moment precisely before the next action occurs.

For a horn player, it is the moment where he has gathered his breath and is prepared to initiate the note—the pure balance point between inhale and exhale. A diver finds the moment of motionless serenity between ascent and descent.

Imagine a Cartesian coordinate semantic grid system with adjective pairs arrayed about the origin. Each word has its precisely paired antonym and the midpoint of the ray that connects them is bisected at the origin.

The pure form of the act of trading for me is to achieve a timeless correctness—to take actions or to refrain from actions in perfect balance with the needs of the market at that moment; to be nothing more or less than that which is required ideally.

When I trade from this moment, this place, my results generate neither joy nor sadness; they simply are what they are. This allows me to enter the next trade with no emotional charge. I find this state keenly important to my style of trading. I try to find the hesitation point in a channel trade or in a breakout, where price remains poised between fear and greed. At this point, bulls and bears are in timeless balance and the next leg of the move will begin just as the last leg ends.

When I am able, I stalk the price to that moment of harmony, that zero-state where momentum transitions so I can refine the entry point and the initial stop to be absurdly close. This enables me to minimize open risk and move to “no lose” trade conditions very quickly.

When I know (barring an interruption of connectivity or market discontinuity) that I will never do worse than break even, I enter an immensely freeing psychological state as a professional trader. Experiencing the zero-state provides spiritual nourishment and meaningful satisfaction of that moment provides a meaningful experience having had a brush with Truth and Perfection in a small way for a fleeting moment in my life.

In judo we speak of a moment in a throw where you and your partner are equally sure that the other judo player is throwing you with exactly the same force and skill as you are throwing them. In that moment the throws stop, time slows, and you are suspended in a moment of pure being.

My exercise of attaining the zero-state smoothes my equity curve and rewards my trading practice.

About the Author: Ken Long is a retired Lieutenant Colonel in the U.S. Army with a Master's Degree in Systems Management. He is a doctoral candidate researching the management of uncertainty and an active trader. Ken is the founder of Tortoise Capital Management, www.tortoisecapital.com, where he conducts market research and publishes a newsletter for his trading systems' signals. He is a proud father of 3, a husband, teacher, student and martial artist. The above article was reprinted from Ken's blog. Read more of Ken's essays at http://kansasreflections.wordpress.com.

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One of the great differentiators between technical analysis indicators is whether they “lag” price action or “lead” price action. To see the difference clearly, let’s look at examples of both.

Lagging indicators tell us where the market has been. They generally operate on the premise that the price will continue in the direction it’s been going until proven otherwise. The best known lagging indicators are moving averages (MA). Here’s a chart that shows how a moving average follows prices well in strongly trending periods, but then gets chopped up by price movements in directionless or sideways periods.

Leading indicators attempt to anticipate the market's next move. The most popular indicators are momentum oscillators like stochastics and the Relative Strength Index (RSI). At the most basic level, leading indicators can tell us to sell overbought markets and buy oversold ones.

Keep in mind that leading indicators are not panaceas. In some cases they can be very useful in identifying price turning points; however, in other cases they “call” turns before they actually happen.

Today, I’d like to show a very interesting chart from the research folks at Astrikos. The top chart shows the S&P 500 cash index since 1996 and the bottom chart shows the total number of actively traded stocks (total issues) on the New York Stock Exchange (NYSE).

With only several moves visible in this chart, there are too few data points to draw any truly statistically significant conclusions. Still, the charts give us some interesting food for thought.

As you can see, a reduction in the number of listed stocks tends to happen ahead of market drops and an increase occurs before market bottoms. You can also see that as a predictive indicator (presuming of course that the level of total issues has any predictive prowess), it was very early in its forecasts—by as much as a year. Also note that the number of stocks trading on the NYSE has not recovered significantly from the March 2009 bottom and is, in fact, sliding back toward its 14-year low.

Think for a moment about what the total issues chart says from the perspective of overall “health” for equities markets. If growing new companies are not joining the stock exchange to raise money, could you honestly say that this is a sign of renewed health for the equities markets in the coming year? While there are other ways to raise capital, this chart suggests that selling stock is not very attractive for companies right now or that there are simply fewer companies around that meet the NYSE's listing requirements. Neither of these cases should encourage the bulls much in their outlook for an intermediate-term move up.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "iitm.com".

I have always loved the markets and once I read about you in Market Wizards three years ago, I knew I wanted to know more about you. As such, I have followed your newsletters with a religious fervor since then. However, I did not want to purchase your courses at the time as it would have meant reducing my trading stake to do so. It was only after a devastating loss (financially and emotionally—I couldn’t understand what was wrong with me) about two years ago that I realized that the cost of not having the courses was far too severe. I could easily have purchased a few courses with the loss.

I stopped trading immediately and took your Investment Psychology Profile, which so clearly highlighted my problem: I was a plunger that was seeking excitement in the markets. It made so much sense and just being aware of these tendencies has helped me immensely in all of the decisions I’ve made since then.

I bought your Peak Performance Home Study Course and have not stopped working through it. I have read quite a lot about the markets, but I have never come across anything as insightful and helpful as your course!

Without your course I would not have been able to make the transition into full time trading. Two months ago, I left my job after saving for some two years to build a trading stake, doing your course and developing a trading strategy with a positive expectancy, and I joined a proprietary trading firm.

I bought A Course in Miracles at about the same time as resigning and that too has made a dramatic impact on my life.

Well, it is two months later now and I am trading profitably. I have also developed an even deeper desire to improve myself and become as good a trader as is possible.

Many thanks for developing your courses and for your ongoing commitment to being such a good trading coach. It is a joy to in some way have contact with such a big spirit!

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