Lesson 6: How To Develop Discipline In Trading

Discipline is all about controlling our states of mind.

If we can shift our states of mind consciously, we can develop discipline.

Unlike other social environments, the trading arena has many characteristics requiring a very high degree of self-control and self-trust from the trader who intends to trade successfully.

Nature of markets

  • The markets are random. We can’t tell with precision the direction of markets on a tick-to-tick basis.
  • The markets are constantly in motion. Prices never stop moving.
  • Markets are erratic.

When you are trying to make money in such an environment consistently, you must work on yourself. Part of working on yourself is developing high levels of discipline, ensuring your behavior or decision in the markets is structured.

In this lesson, we will look at techniques to develop discipline and the pitfalls that cause indiscipline.

Why Traders lose discipline

” Investing is not a game where the guy with te 160 IQ beats the guy with the 130 IQ… Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”– Warren Buffett.

If there’s a single theme that dominates discussions of trading psychology, it’s discipline.

Traders are routinely encouraged to control their emotions and stick to their processes.

If you lapse in your trading, it’s because you’re not sufficiently disciplined.

Here are the main challenges traders face in maintaining discipline;

  1. Personality Traits- Some people score low on a trait called conscientiousness. They do not plan and follow through nicely and are impulsive. Impulsive decision-making will manifest itself as a problem with discipline in trading. Our objective is to identifying whether or not personality is a cause of discipline problems is determining whether a similar loss of domain occurs in other facets of life (outside trading). If a person is disorganized and lacks conscientiousness in their work, social life and life generally then it adds up that this trait would carry over to their trading. In another lesson, we will share how to develop a system that fits your personality. A trader who scores Low on this trait should create a rule-following system. He should try to establish rules that will guide his behavior always.
  2. Unwillingness to accept losses- Behaviors like fear in trade execution are occasionally driven by the refusal to cut losses. The game requires someone who has learned how to take losses. Loss aversion is not an option in this game.
  3. Situational performance pressures, such as trading slumps and increased personal expenses, change how traders trade (putting P/L ahead of making good trades).
  4. Environmental distractions and boredom cause a lack of focus which can quickly turn into indiscipline.
  5. Lack of a well-defined trading plan or strategy. A plan is a roadmap that will guide your navigation in the markets. Lack of a roadmap only translates to poor decision-making.
  6. Taking on too much risk. High risk creates higher stress, and higher stress creates anxiety and worry; all this weighs down badly on your decision-making ability. Extreme positions also carry with them the potential for painful losses that no one wants to take. So taking appropriate risk is a crucial necessity of, as well as a component in, disciplined trading.

Strategies for developing self-discipline

  1. Self-awareness over our mental states – Learning to control our mental states of mind is crucial for traders. We have already shared some of the techniques that we can use to build self-awareness. At this point, I will share one last strategy to use in trading: associated position and Dissociated position. Associated position can be illustrated by the process by which we experience emotions, thoughts, and sensations. In the dissociated scenario, you are the one observing and watching yourself. Our goal is always to hold the dissociated position. The main reason for dissociation is listening to the messages from your states of mind. For example, anxiety signals that there is something in your future that you need to prepare better.
  2. Use of rules – Rules are used to create order. In trading, we can use rules to guide our behavior and decision-making.
  3. Use of positive intention to understand negative emotions. Often people think of negative emotions as bad. Negative emotions come as a result of our thinking patterns or behavior. We should learn to treat negative emotions as signals. Instead of thinking about stress from a negative perspective, we can train ourselves to think of stress as a signal of what we need to address. For example, if we are constantly worried about our trading performance, we can think of this as a signal that we need to be prepared for trading.