Proven Methods & Techniques for Mental State Control (Part 1)

Key Takeaways
• 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.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.

• 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’m 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’ve 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’m such an idiot. A good trader would not have 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 empowering challenge. A loss into pride for following the rules correctly. And so on.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.

• 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.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.