Wednesday, March 18, 2009

When Trading Discipline Fails

Discipline is the ability to ensure consistency of thought and action. When we think in a disciplined manner our mind does not stray from the action at hand. Thoughts become actions. Actions become results. Results provide feedback to our thoughts.

Mark Douglas and many others have written books and articles describing the need for discipline in trading. Discipline is widely proscribed for struggling traders as a panaecea for our ills. Despite these educational materials, most traders never ever reach trading success consistently. Why is that?

Steve Pavlina articulately states that self-discipline is only attainable through acceptance of reality. If we wish to be discliplined then we must assess how disciplined we currently are. Thus we might consider the following:

  • do you have a trading methodology that is clearly defined (i.e. written down)?
  • do you trade the same methods every day/week/month?
  • do you have a predetermined stop loss?
  • do you honor it?
  • do you have a predetermined contract size?
  • do you honor it?
  • do you ever take a position just because (e.g. you wanted to get back at the market)?
  • do you trade differently because you are up/down $X?
  • do you trade differently because you aren't feeling well?
  • do you trade differently because of overly negative/positive thinking?
  • what do you wear while you are trading?
  • how comfortable are you with your trading desk/computer setup?
  • how comfortable are you with your trading software?
  • do you have a backup in case your trade station goes down?
  • do you have a drop dead point for the day/week/month/year?
  • do you honor it?
  • how does it feel to hit that drop dead point? do you act any differently in subsequent trading?
Take a real awareness test of these items. How disciplined are you as a trader? Based on the statistics, there are very few of us who can positively affirm all of the above results all the time.

Why is that, and what is it that happens to our rational selves when Trading Discipline fails?

Imagine for a moment that the market has been very choppy in a tight range all morning. You have diligently taken all of your method's signals and been stopped out several times in a row. You are near your drop dead point for the day. Suddenly, the market surges up towards the edge of the range. Is your finger already hitting the buy button without a trading signal?

What just happened is that your emotions have bamboozled you. You have been pawned. Not by the market, but by yourself. Your vision of what reality should be, a positive account statement, is in direct conflict with truth, a negative one. Your emotions have kicked your brain out of the drivers seat and you are gonna "smash the market's face in".

Moments after placing that order, your rational brain come back online. Oh - $hit you say! What was I thinking? Now what do I do? And while your rational brain is trying to resolve this issue the market is ticking lower, and lower. Now your mind is scrambling. You know that you broke discipline and are going to have that on your account statement if you don't "fix" the problem. Well, you rationalize, we are still in a range, I can hold onto this position and get out at a better price once it bounces. As the day progresses the market never reaches your initial entry point. It comes close, but never gets you back to being "whole".

Later that afternoon, the market starts to turn down. It starts giving you valid signals to sell a breakout. Normally, if you weren't so emotionally handcuffed to this trade, there is good chance you would take this sell opportunity here. But you don't. You are bleeding pretty bad already, your account is at -$500 per contract already and you just can't take that hit. Suddenly, there are no buyers and only sellers. The market explodes south of the range, and is pushing with heavy institutional selling. Everything in your body and mind wishes you had not only closed your buy position, but had sold as well. Damn, damn, damn, is all you can think.

Eventually, you exit your long position. Either your rational mind wakes you up and realizes that you could lose your account, or you get a margin call from your broker. You might have even averaged on the way down to try to minimize the damage. But it doesn't matter. You've had a "blow out" experience. Your account is red, your confidence is shattered, your emotions torn.

Where was all that discipline? How many times have you been there before? Can anyone relate to these experiences?


P.S. In the next article I will discuss my thoughts on self-discipline and trading, specifically on techniques I use to monitor and curb the emotional thought processes that can lead to blow out trading.


Jules said...

ME, ME, ME!! Can totally relate to it! Change your example to "SELL", I'll think you were talking about me, LT. LOL!

I'm still very much in love with your "educational" postings like this. That said, your new diary style is very refreshing :-) Hope it has worked for you.

Lord Tedders said...


I have to admit, I was thinking of you, and myself at certain times.

The journal style is something that is good for me. Probably bores the heck out of other folks though :P


Jules said...

Didn't bore me. I'm selectively nosy! LOL! Gather you already know that honest sharing of experience helps others as much as expert advice does. I'm learning more from the former in fact. I'm tired of Doctors. They are not real.

Ok, I'm ranting on your blog again. Will stop before I start writing another thesis :-)

Madison said...

I can totally relate to your story - as it describes so many of my trading days lately. I learn much from your style of writing because you articulate my thoughts for me, and I learn from this.

I will continue to read your educational style of self-examination.

Much gratitude, many blessings!

Market Monkey said...

Interesting summary of emotions that plague all of us from time to time (ALL the time for me right now! Hence the reason I'm reading your article)