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Tradovate Top Trader Interview Series - Trading Psychology with Dr. Gary Dayton

Posted by Kira Brecht on July 7, 2015 at 5:20 AM
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GaryDaytonTrading Psychology: Dr. Gary Dayton Helps Traders Find Their Zone

Professional athletes call it "being in the zone" a state of being in which they achieve spectacular feats in a nearly effortless fashion. The ball hits the hoop, the pitch blows by the hitter, or the quarterback delivers his throw.

Dr. Gary Dayton, a clinical psychologist and active futures trader himself, studied the physiology of the state of mind behind the zone. Author of a new book Trade Mindfully: Achieve Your Optimum Trading Performance with Mindfulness and Cutting Edge Psychology, published by Wiley in 2015, he created a framework for traders to apply these concepts to their trading.


Dayton, an active futures trader since 1999, is also the founder of Peak Psychology Inc. He applies cutting edge scientific research on mindfulness to the emotional and psychological challenges of trading and helps traders reach their own peak performance abilities. I sat down with Dayton to discuss his work.

Tell us about how you got started in trading?

I was still in graduate school working on my psychology degree and I received a booklet about trading futures in the mail. I now realize that that booklet was simply a marketing tool, but at the time I was fascinated by what I read. I ordered the material, and when I received it, I stayed up all night absorbed by what I read. I was hooked.

What is your trading approach—fundamental or technical or both?

It is purely technical, but I also work with a small hedge fund that bases its investment decisions solely on fundamentals. My personal trading approach is based on the Wyckoff Method, which is all about reading the market by its own actions through price and volume. I look only at the chart, and although I know when reports are due to come out, I don’t try to interpret the news. I trade market action.

Do you have a favorite futures market that you trade and why?

Yes. My favorite futures market is the S&P e-minis. It’s the most liquid market traded and on all but a small number of days, there is good daily range. I am primarily a day trader, and the S&Ps typically offer a couple of good, tradable swings each day.

Tell us about your work as a psychologist and trading coach?

I’ve worked with individual traders and hedge fund managers on the mental side of the game. For both types of clients, I help them develop their trading process and the mental skills needed to follow their process. In a probabilistic business like trading, the winning trader will always have a well-defined process that they adhere to. I also teach traders the almost lost art of reading the market by price and volume. Called Deep Practice, I train traders in a learning context informed by over 40 years of psychological research on what makes great performers great. Deep Practice involves both technical chart reading and the psychology of trading in a way that accelerates learning and promotes mastery and expertise.

What is a common psychological challenge that you find traders face?

In terms of psychology, it’s almost always about fear of one sort or another. Traders fear loss or missing out on a move or leaving money on the table. These fears can affect how they trade, causing a range of erratic trading actions from cutting winning trades short to overtrading.

How can they overcome that challenge?

There are multiple steps. The first thing is to recognize it and also to recognize that what they have been doing to try and “fix” it hasn’t been working. I have found that especially when it comes to fear-based issues, the best solution involves learning the skill of mindfulness rather than to try and control or suppress emotion, which, unfortunately, is the conventional wisdom traders hear and think they need to do. But, control never works. Traders need to develop more appropriate mental skills that are learnable and can be applied effectively in trading situations.

What was the impetus for you to write this book?

As a both a trader and a psychologist, I realized pretty quickly how important psychology is to trading. Traders are always looking to reduce risk on their trades, and part of risk has to do with our mental skills and abilities in handling that risk. Without solid mental skills, traders can easily act in an unsafe manner, compounding their risk rather than their returns. My book, Trade Mindfully, is designed to help traders not only understand how their mind works when trading, but also to develop the mental skills needed to thrive in the markets and maximize their trading performance.

What is mindfulness and how can it be beneficial for traders?

The way I use mindfulness is simply as a mental skill that helps us separate ourselves and our trading from the mental and emotional chatter many of us experience when trading. It comes from Buddhist and Yogic traditions, but I’m not using it in a spiritual way.

bookMindfulness as a mental skill helps us to stay present in the moment and helps us keep our focus and attention on the trade and the actions needed to make, manage and complete that trade in a skillful way. Because of the way the mind works, it is easy for us to fall victim to the stories it can tell us. For example, the mind might tell us that we will have a loss on this trade, or the Federal Reserve might act which would be negative (or positive), or my trade is running so strong it will triple in value.

These stories can lead us to take trading actions that are not in the best interests of the trade or our performance as traders. Usually, we believe the mind’s stories uncritically and without even being aware that what the mind tells us often turn out to be untrue and unrealized, yet we continue to believe it. Mindfulness helps us to mentally step outside of our thoughts and feelings so that we can see what is actually happening more clearly and be able to apply our trading skills more effectively.

What are some other key messages that you share with traders in your book?

Traders focus on emotions and try very hard to suppress strong emotions such as fear and greed. Trying to suppress and control emotions is not a good idea. In many instances, the act of suppression will actually amplify them. The more we try not to have them, the more we have them. There are much better ways to deal with strong emotions than control. Also, emotions are only a part of the mental challenge a trader faces. Our normal ways of thinking, for example, can easily get us into trouble.

How can sport psychology be applied to trading?

The performance aspects of trading are very similar to the performance aspects of sport. Sport psychology has developed ways to help athletes deal with fears and the stresses of performance. Psychology in sport is also used to help athletes develop themselves with specific applications that help the athlete improve performance. I’ve adapted the best of sport psychology for traders.

What is one thing traders can start doing right now to help them overcome psychological challenges and become better traders?

Learn to see their thoughts and feelings as passing internal events that are often constructed by the mind’s projections about the future. What the mind tells us is not always true and certainly not always what we should be basing our trading actions on. Learning to stand apart from the distractions generated by the mind is one of the greatest mental skills a trader can develop.

What are some of the advantages of trading futures?

I think there are several. First and foremost, the futures markets are well-regulated and transparent. Dark pools and other aspects of the equities markets hide trades. The FX market is run by large banking institutions that are also actively trading the currencies. The futures exchanges give us independence and transparency other markets just don’t have. Leverage makes it much easier to trade the futures. We don’t have to commit as much capital, though, of course leverage is a two-edged sword. It can take away just as quickly as it can build, but to a skilled trader, the benefit is clearly there. I also like the nearly 24-hour market. A trader can enter a trade before the US equities markets open and capture some nice “pre-market” moves.

What is the most important lesson you've learned about trading and the markets?

That controlling your risk is always your best play.

What is your favorite thing about trading?

It supports self-reliance. It’s me and me alone that makes or breaks my trading. There are not too many venues in which that can be said and money can be made.

What advice do you have for beginning traders?

Practice, practice, practice, and practice some more. Most jump right into the markets putting their money on the line looking to make big money quickly. I believe that much of the fear traders have about the markets comes from this. It’s not really the case that most traders have psychological difficulties or disorders that must be solved in order to trade well; it’s that they don’t have the requisite skills needed to interact with the markets effectively and profitably. In many cases, traders have taught themselves to be fearful of the market because they jumped in too early. Find someone who can teach you the ropes, focus on risk and money management, and practice a lot before committing good money.

How has the trading industry changed in recent years?

The biggest change has been that trading is now completely online. When I first started, I called in my orders. The last of the open outcry pits are closing. More recently and as an outgrowth of computerization, high frequency trading has emerged as a force in the markets. There is another change about to unfold with the way in which the CME will be releasing live trade data. There is always change. Nothing stands still.

What still needs to change?

I’d like to see better regulation of high frequency trading. Some of the reports I’ve read about the recent “flash” crashes indicate overall market risk is increased with HFT in these situations.

What do brokers and tech providers need to do better for individual traders?

They could be important sources of education for individual traders.

What's next for you?

I am looking forward to just trading. My book, Trade Mindfully, took almost three years to write. Since it was published earlier this year, I’ve done a fair number of media interviews and written a few articles to let people know about the book. I’ve never been a multi-tasker, and all that has taken me away from trading. I am looking forward to some good solid trading for the next few months.



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