Trading requires discipline. A trading plan is of little value if you abandon it prematurely. The disciplined trader executes a plan and controls his or her emotions until the plan comes to fruition. Although most traders intellectually understand the importance of discipline, many would-be traders have trouble staying controlled at critical moments of investing.
Drs. Baumeister, Muraven, and Tice (2000) argue that self-control is a limited resource. When we show self-control in one area, such as trying to control our diet, we don’t have energy left to show self-control in other areas, such as concentrating on following our trading plan. Now, that’s not to say that one should abandon dieting to be a disciplined trader, but it’s useful to consider that humans have limits regarding their ability to show self-control. Self-control is like a muscle.
If you try to lift too much, you’ll wear yourself out and you’ll need to get some rest before you can try lifting a heavy object again. The same can be said of self-control. Contemporary life is full of demands requiring self-control. You try to control your diet, keep your house clean, manage your spending, and keep obligations to family and friends. Depending on the strength of your self-control “muscles,” you may not be able to handle it all. Something has to give.
A study by Megan Oaten and Ken Cheng (2005) illustrates how self-control is a limited resource. They randomly assigned participants to complete a task either under stress or under no stress. When participants were stressed out, they had difficulty completing the laboratory task. They also reported having difficulty keeping up with demands in their everyday lives, such as controlling their diet or keeping their house clean.
These findings suggest that self-control is like a muscle that can become worn out. If you try to trade while overly stressed out in your personal life, you’ll have trouble sticking with your trading plan, especially if you are a novice trader who has relatively little experience maintaining discipline when your money is on the line. It’s important to be aware of your ability to maintain discipline. Just like a muscle, if try to do too much, your self-control “muscle” will fail. Rather than over-taxing your limited self-control resource, you must start slow and work up to gaining more self-control.
How do you build up self-control “muscles”? First, minimize daily stressors, or if you have a lot of stress, cut back on your trading until you can alleviate stress and free up psychological energy in your personal life. Second, do self-control workouts. The more practice you have at self-control, the more likely you’ll be able to stay disciplined while executing a trade. You might try a visualization exercise in which you imagine yourself executing a trading plan and maintaining self-control under a variety of scenarios.
The winning trader is disciplined. But discipline isn’t easy to come by. You must acknowledge your limitations. Don’t set yourself up for failure by thinking you can be disciplined all the time. Like everything else, discipline takes practice. The more you can build up your self-control “muscles,” the more easily you can execute your trading plans with grace and decisiveness.