Why Traders Lose Their Discipline

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Brett Steenbarger

06 Jan, 2012

in Psychology and 1 more

When traders lose money, they often attribute the problem to a lapse of discipline.  Such a lack of consistency, however, is actually the result of many different problems--not the cause.  Traders lose discipline with trading for the same reasons that dieters lose discipline with dieting or people getting in shape lose discipline with exercise.  Quite simply, our moods, needs, and mind states of the moment tend to overwhelm our longer-range intentions.  We pursue short-term pleasures (and avoid short-term discomfort) at the expense of longer-term rewards.

Here are some common reasons why traders (and most other human beings!) fall short of being fully intentional:

  • Environmental distractions and boredom cause a lack of focus - All of us have limits to our attention span and these are easily taxed during quiet times in the market;
  • Fatigue and mental overload create a loss of concentration - The demands of watching the screen hour after hour make it difficult to be sharp, creating fatigue effects that are well-known to pilots, car drivers, and soldiers;
  • Overconfidence follows a string of successes - It is common for traders to attribute success to skill and failure to situational, external factors.  As a result, a string of even random wins can lead traders to become overconfident and veer from trading plans--especially by trading too frequently and/or trading excessive size;
  • Unwillingness to accept losses - This leads traders to alter their trade plans after trades have gone into the red, turning what were meant to be short-term trades into longer-term holds and transforming trades with small size into large trades by adding to losers;
  • Loss of confidence in one's trading plan/strategy because it has not been adequately tested and battle-tested - It is difficult to tolerate even normal drawdowns unless you have confidence in your methods.  This confidence does not come from mere positive self-talk.  Rather, it is a function of testing your methods (historically and in real-time) and seeing in your own experience that they truly work;
  • Personality traits that lead to impulsivity and low frustration tolerance in stressful situations - Psychological research suggests that some individuals are more impulsive than others and less conscientious about adhering to plans and intentions.  These personality traits often are accompanied by stimulation-seeking and a high degree of risk tolerance: a deadly combination.
  • Situational performance pressures - These include trading slumps and increased personal expenses that change how traders trade and lead them to place P/L ahead of making good trades.  By worrying too much about how much money they make, traders can no longer follow markets with a clear head;

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Emotions regulation

The most important cause of losing discipline is emotions , if all the above criteria are met , emotional hard wiring is required for when market becomes extremely irrational .

Jan 13, 2013

Member (2059 posts)

Re: Why Traders Lose Their Discipline

cant agree more... and just made such mistakes recently.. earned 3 weeks, and giving back all the gains within 4 days.

Apr 17, 2012

New Member (2 posts)

Re: Why Traders Lose Their Discipline

Dr Steenbarger writing on the subject of the psychology on trading is very stimulating and definitly worthwile reading and studying. This article is not ecxeption, even more fruitful when read in conjuction with many other works written by that same author, and easly available on Amazon and on intrnet. The benifits of serious studies of the subjects related to trading are very real. I highly recommend Dr Steenbarger works.

Mar 11, 2012

Member (1167 posts)

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