Keeping a level head when buying and selling
Improvisation, luck and natural talent are all great things. They even have their place in trading, but discipline is the undisputed foundation of success when it comes to the markets. And it all has to do with getting the bigger reward.
In a classic psychological experiment in the 1960s, researchers in Stanford offered kids the choice between having a marshmallow now, or two marshmallows if they could resist eating the first one for 15 minutes. Some managed to delay their craving, but others didn’t. Later on the two groups were tested for overall achievement in their lives and the ones who managed to control their sweet tooth indeed had better scores.
When you start trading you might be looking for a quick way to get into profit, similar to the more impulsive kids. But in an area with a multitude of factors that influence the price and movement, your gut feeling simply won’t do. Some might hit gold the first time, but it’s quite likely they’ll lose it soon after.
Herein lies the importance of discipline in trading. It’s not only about looking at the price and indicators of a given instrument – it’s also about looking at yourself, your state of mind and how it’s affecting your judgment.
There are several examples of trading “under the influence”:
- Loss recovery – after losing a trade you immediately try to win it back regardless of where the market is
- Overtrading – some might become addicted to trading itself, or they might feel overly positive and open far more positions than reasonable
- Incoherence – opening positions too soon, closing them too late, taking different factors as signals etc., all amount to an erratic trading behaviour and a series of lost trades
The good news is that discipline is like a muscle. If you train it, your “reservoir” of will power will increase. How to do this? First determine your own limitations by consciously observing yourself in the above or similar situations. It would be great if you could do it while its happening, but if you don’t manage that at first, then keeping a log of your trades and what led you to make them will be enough. Naming the mistake and attaching it to a losing trade will also make it easier to increase your future awareness.
Sticking to a plan is what counts here and knowing in advance the challenges ahead gives you an advantage. Don’t trade when your capacity for discipline is exhausted, i.e. when you’re tired, cranky or when you’re distracted. It’s the most crucial factor in trading and just like in the marshmallow experiment, it will determine your long term performance.