Discipline… a common variable in the successful trader’s characteristics. There are common aspects of discipline that are very easy to see as applied to a trader. These can be categorized in the statement “following your rules”. You need to follow your predetermined plan for your trade… everytime.. no matter what. If you have had any instruction at all for trading you have heard this before. So, let’s look at what a simplified version of what “rules” are for a trade. (Notice I say simplified due to the fact I am generalizing for any trade… choosing the stock or investment vehicle for example could be a “rule”… but for the trade itself I will use the two fundamental components of a transaction.)
1) Entry- Being able to recognize when the market is providing you with a predetermined edge. You need something to trigger you to say.. “hey, the probabilities are in my favor, right now, in this moment.”
2)Exit- Being able to recognize either a) your probabilities are no longer present, based on your reason for entry b) your profit target has been achieved for your particular predetermined strategy
These two components are straight forward and are widely accepted as good practice for a trader. But, there are lessons in discipline within these components that are not so obvious. They exist on the opposite side of the stated. In other words the “yang” of the “yin” or the shadow from the light. What I am talking about is this, when applying the rules above it is easy to see when to take action as it is stated exactly how… but it also says when NOT to take action by NOT stating it. In other words, if you do not have an entry, a predetermined edge (predetermined is critical) you have no entry thus your action is nothing. If you entered a trade and the probabilities are still in your favor, your action is nothing, and you stay in.
I bring up this lesson as I have noticed that in todays market, August of 2009, the probable edges are becoming more difficult to find. This could be attributed to a number of factors…
-August is typically a difficult month due to lack of volume, traders taking vacation. However, the SPY volume, on a monthly comparison is huge this year compared to last. Yet the probabilities still seem to evade.
-The market is in a very abnormal state. This seems to be very true as you will find trader after trader seeing their once profitable strategies going up in smoke.
So, no matter what the reason, the probabilities are not presenting themselves near as often as they once did. In this type of environment a disciplined trader trades LESS. This might seem straight forward and easy to do. Yet, the common discipline destroyers: greed, ego, and self-image provide resistance to following this particular component of discipline ["no action"].
-Greed: When a trader makes money one day he/she makes a mental note or asking or thought of “I want to make that tomorrow and the next day and the next day.” This is a fallible way of thinking and undsciplined because it overrides the “no action” component. You do not know exactly when the probabilities of a specific trading strategy are going to come up again. Your mind becomes pointed in the direction of “I HAVE to make money today”. Thereby, you feel a sense of loss when you dont make the same amount of money on the following day. Trying to make up for that loss leads to forcing trades. If, the trader kept a thought process of, “I want to find that probability/edge again.” then greed can be lessened or eliminated.
-Ego: If a trader is wanting to prove something having to do with his/her trading skills.. whether that be to another trader, his/her spouse, him/herself, etc… there is a tendency once again for a feeling of failure if they are not trading. Again, finding themselves needing to make money in order to prove themselves. So, they find themselves “inventing” probabilities for the possibility of making money. Creating/forcing trades in the hopes that maybe, possibly the market will go in their favor.. IE guessing/gambling ..”if this one will work out, I will be validated in the eyes of… whomever”.
-Self-image: Most of us want to, believe we are/be seen as, hard workers. Why? We feel a need to prove to ourselves and others that we are worthy of prosperity through sacrifice. (This in and of itself is a failed perspective as we all are worthy of prosperity regardless of our actions.) When we dont trade, we can feel lazy. We start to worry that we are not doing enough to prove our worthiness, thus not moving forward towards prosperity. This correspondingly leads to action, when our discipline says “no action”.
The lesson: Discipline is both.. action and no action. A recognition of the destroyers of discipline can lead to a balance of the two sides; bringing better chances for success in the market.
