The difference between a seasoned, winning trader and a novice, unprofitable trader is the ability to muster unwavering self-control in response to chaotic, ever-changing markets. Trading is a serious business. It’s not a hobby, but many novice traders treat it that way. They don’t develop a trading plan, and if they do, they tend to abandon it prematurely. Trading is fun and exciting, and the quickest way to get a thrill is to trade by the seat of your pants. But seasoned traders are methodical. They carefully develop a plan, execute it, and stick with their plan. They are disciplined and controlled. Discipline is a key factor in trading success, and it is crucial that you maintain discipline.
Why is discipline the key to success? Trading is largely a matter of capitalizing on odds. Assuming a given trading strategy has a past performance record of 85%, for example, it’s a matter of odds that the particular strategy will obtain that level of profitability in the future. It may not. Unanticipated factors, such as a change in market conditions can go against the strategy, diminishing its performance record. A lack of discipline makes matters worse.
Assuming the trading strategy does have a high probability of future success (as roughly gauged through backtesting), the only way to take advantage of the law of large numbers is to execute the trading strategy flawlessly on as many occasions as possible, and as defined by the guidelines of a clearly specified trading plan. The disciplined trader decisively trusts the trading strategy enough to commit funds to it, allowing for a reasonable chance to capitalize on the odds. The undisciplined trader, in contrast, wavers. He or she follows the trading plan inconsistently, trading the plan occasionally while going a different way at other times.
Discipline and self-control are well-studied personality traits. Some people are highly disciplined and very self-controlled. They scrupulously follow rules and are careful to control their impulses. You know the type; they pay off their credit cards every month, are never late for an appointment, and carefully plan every detail of their lives. Although these characteristics may be ideal for trading, there’s a downside: overly disciplined people may have trouble taking risks.
They prefer a sure thing, and trading outcomes are rarely sure things. Traders tend to prefer living a little on the wild side. They may not recklessly seek out risk, but they don’t mind it. Relatively speaking, they tend to lack discipline and control. Perhaps that’s why so many trading books and coaches find it necessary to preach the virtues of self-control. How are your discipline and self-control?
Do you have trouble sticking to your trading plan? Do you long for more discipline and self-control when it comes to your trading? If you have trouble with discipline, you may want to try to observe your level of self-control in your everyday life and try to gain more self-control. How much discipline and self-control do you practice in your everyday life? Are you late for appointments? Do you spend more money each month than your budget allows? Do you frequently find yourself breaking promises? It’s not necessarily the case that a disciplined trader is disciplined in all aspects of one’s life, but it helps.
The life strategies we use in everyday life may bleed over into our trading life. If you often overspend, overeat, or have an unrestrained need for pleasure, you may find maintaining self-control and discipline while trading a little more difficult than others. So try this exercise: spend a few weeks trying to control as much of your life as possible. Pick specific areas where you can gain more self-control. Control your caloric intake, the money you spend, and time spent in leisure activities. See how well you do.
It may change your reference point. You may soon discover that you rarely control your impulses, and can do much better. And this, in turn, may positively influence your ability to stick with your trading plan. It’s worth trying. Discipline is the key to trading success, and it’s vital that we do everything we can to increase it.