Getting StartedPsychology

Trading Discipline – Do you Have It?

dis ci pline (n.) 1. Training intended to produce a specified character or pattern of behavior. 2. Controlled behavior resulting from such training. 3. A state of order based upon submission to rules and authority. WEBSTER’S CONCISE DICTIONARY.

How do you react to rules? Do you find them to be a burden, a drudgery to observe and obey? Do you look at them as something negative, a restriction to your freedom perhaps?

Or, do you instead see rules as beneficial, as a protection from possible harm? Do you find that rules are necessary in your trading?

While growing up, we were constantly confronted with rules of one type or another. We received rules in proper hygiene, how to address other people, how to respond to various signs on the road, etc. Wouldn’t you agree, that by following these rules it helps us stay healthy, have good association with others, and avoid serious injury or death? Absolutely. It is without a doubt that when we reflect on the role that rules play in our lives, it becomes clear that they were provided for our benefit and well being.

Of course, there are times when bad rules are made, or when following a rule it does not protect us from what it originally was intended for. But this is the exception rather than, excuse the expression, the rule.

The thing about rules is that they will not do us any good if we do not have the discipline to follow them. Ask yourself, do you have the discipline to follow rules, or do you find yourself conveniently forgetting them? How you answer this question will help determine whether you may be exposing yourself to unnecessary risks.

I’m sure that anyone who has been trading for any period of time realizes the dangers inherent with the occupation. Since our system of barter is still the use of money, and it is money that helps us support our families, losing it can be quite hazardous. That is one reason why we need to understand the first rule of trading, ONLY TRADE WITH MONEY YOU CAN AFFORD TO LOSE. Failing to follow this rule spells disaster from the very beginning. You will have the tendency to trade scared, make rash judgments, and most likely make your financial situation worse.

Do you have the discipline to follow this rule?

When driving on the road, we find that there are many rules we must obey. If we obey them all, this does not guarantee that we will make it to our destination safely, but it does provide us with the best odds of successfully doing so. Yet, all it takes is for us to break just one rule, such as not stopping at one red light, and the result can be fatal.

In trading it is no different. There are many rules that are the result of past trading experiences. Experienced traders have been victim to many accidents in trading over their careers and have come up with specific or general rules to help others avoid or minimize the impact of such accidents. But just like rules of the road, we need to follow ALL the rules pertaining to the type of trading we’ve chosen. To do so will require our exercising discipline.

We need discipline, for example, to follow rule number two which is to ONLY TRADE IN THE DIRECTION OF THE TREND. This is one rule that not only requires the ability to discern what that trend is, but the discipline to obey it. Most traders find that they lack the necessary discipline to do this. A particular market may be moving down in trend, yet a bottom seems to have appeared and the temptation for picking the very bottom to go long becomes great. This temptation then causes a trader to reason that this is it, and if he were to follow the rule to trade only with the trend, he would miss the big one. Discipline is then thrown right out the window, the trade is made, and many times the increased exposure to risk causes a disaster to the traders account. It is usually then that he may reflect on the error of his way.

Do you have the discipline to follow this rule?

Now if a trader does have the discipline to follow the first two rules, this is a good start. However, another rule needs just as much discipline to obey and is just as hard to do so. Rule number three is that a trader should ONLY RISK A SMALL PERCENTAGE OF HIS TRADING CAPITAL ON ANY TRADE. This percentage will vary depending on whom you may ask and the amount of trading capital that is available, but the common rule of thumb is that for accounts of $10,000 or less, no more than 10% should ever be put to risk at any time. This percentage should drop off considerably for accounts much larger. Proper risk management is important to increase your chance for success.

Do you have the discipline to follow this rule?

Now, all rules are good, but they won’t help you be successful in trading unless you follow our final rule, BE CONSISTENT IN HOW YOU TRADE. This rule is somewhat blanketing in that it refers to all aspects of ones trading. A trader must be consistent in his approach to the markets, whether he be using a mechanical system, or one that requires continual decision making by the trader. The rule also applies to following all the other rules consistently. If we follow them sometimes, but break them at other times, we are certainly not being consistent and will leave ourselves open for trouble.

Do you have the discipline to follow this rule?

These are just a few simply stated rules, yet very hard for most traders to adhere to. They lack the necessary discipline to stick to them on a consistant basis. It is human nature to feel that we can do better than the rules would allow us to do on certain situations, yet to only use them sometimes and not others makes them ineffective for the purpose they were created for, to protect us and allow a chance to succeed.

So then, where do you currently stand when it comes to having the discipline to follow trading rules? If we recognize that we are indeed weak in this regard, it would do us good to go over the points brought out in this message again as well as consider some books on the subject, both of which can help us strengthen our awareness to have discipline in following rules if we are to succeed.

Do you have the discipline to follow this suggestion?

Richard started his career for 19 years in Computer Technologies/Programming. He started trading Futures and Commodities in 1989 and went on to start ProfitMax Trading Inc. in 1996, specializing in forecasting market turns in advance and producing specialized forecasting software applications for traders for the purpose of Precision Timing the Futures, Commodity and Forex markets.

Richard started his career for 19 years in Computer Technologies/Programming. He started trading Futures and Commodities in 1989 and went on to start ...

RichieE

Well-known member
279 17
How do you know? Psychology vs Adaptation

The biggest question I have here is when do you 'adapt' and when do you stick with your trading strategy.

We do not know whether our strategies truly work... how do we know if we have just been 'lucky' verses by 'smart'.

In the classical probability thought experiment, if a man tosses a single coin in the air it will have a 50% probability of landing on heads. When 1,000,000 men each toss a single coin in the air I will expect approximately 50% of them to land on heads. However, if we ask these 1,000,000 men to toss each of their coins 10 times in a row, I will get approximately 977 men whose coins which will have landed on heads every time.

What do you think would happen if I had performed this experiment with 1,000,000 traders pulled off the street? I reckon that some of these 1,000,000 men would start selling their 'coin tossing' methods in books or maybe give seminars for vast amounts of money. After all... they managed to get heads 10 times in a row didn't they?

The point I am making is the following? "When do you truly know that your system is correct." On one hand, if I follow Richard Dennis and his 'Turtle System' I should follow the rules without exception. However, if I am testing a new and unproven system how do I know whether a rule is 'wrong' or whether I am experiencing a statistical aberration?

Answers anyone?

RichieE
 

TheBramble

Legendary member
8,395 1,170
We do (or you should) know if your strategies work and when they are ‘correct’. While they are of sufficient consistency to meet your trading requirements – they work – by definition, if they’re providing you profits within the context of your risk profile. I say ‘while’ as strategies are very much a function of time.

‘Lucky and ‘smart’ really don’t have much currency within a proven trading strategy profile; they’re more useful for trading system and seminar sellers and as headlines for new trading books.

The thing is, there’s a fine line between assessing a previously successful strategy as a newly failing strategy – either temporarily or as a dead duck - and jumping ship at the first sign of a squall, which is what many inexperienced traders tend to do.

The real trick is determination of when a strategy has gone cold. This is a quantitative issue. Number of consecutive losing trades increases. You get whipsawed around. Stops get hit virtually as soon as trade entered. pW:pl goes totally out of whack. But, the setup criteria haven’t changed and are still met. This happens. Markets invert their cycles and they don’t always do it cleanly, in fact, rarely. At consolidation, trend commencements and reversals, the transitions are rarely one-off events. Most strategies will take a hit over a period during these transitional periods. (Note: some strategies are positively built to leverage these transitional periods too).

You can either continue to trade at full size (stupid in my view) during these times knowing they’re going to be short-term, or stand out until you revert to mean (better). My personal view when hitting an out-of-phase state with a strategy is to massively downsize my position. I found that by sitting out completely I didn’t stay sufficiently in tune to recognise when I was back on. That might just be a personal idiosyncrasy.

The thing is, this is just a market transition event, it has nothing to do with a long-term winning strategy being suddenly wrong, long-term

When a strategy has reached it’s sell by date the issue is more one of a qualitative nature. The setups don’t quite make the 100% across all areas, or the nature of the moves toward (or away from) setups are different. Its a basic shift in the underlying nature of the markets. This does happen, but not often enough o whack all your strats in one go and infrequently and slowly enough (normally) to give you ample warning of the sea change ahead. The nature of these changes are a gradual failure across one or more of the setup criteria leading to a gradual diminishing of profit. The trades aren’t failing any more often than your Pw:pl overall, but your R:R does.

It’s too blatant to suggest the nature of these two issues, the quantitative and the qualitative can be assessed by the relationship of your changing Pw:pl to your R:R, but it wouldn’t be a bad place to start.
 

Crap Buddist

Senior member
2,458 289
The biggest question I have here is when do you 'adapt' and when do you stick with your trading strategy.

We do not know whether our strategies truly work... how do we know if we have just been 'lucky' verses by 'smart'.

The point I am making is the following? "When do you truly know that your system is correct." On one hand, if I follow Richard Dennis and his 'Turtle System' I should follow the rules without exception. However, if I am testing a new and unproven system how do I know whether a rule is 'wrong' or whether I am experiencing a statistical aberration?

Answers anyone?

RichieE

Very good point. The answer may well vary between individuals, but .... it makes sense to me to use an approach which identifes & anticipate flow of the price and bet on that. As some one quoted in another thread the other day, something like..

Its not enough to see whether the trend is up or down, but to SEE the trend....


Not familiar with Dennis and his "when the old turtles head appears, smash it approach"

Now how long before any Trader can see the trend? weeks, months, years. never? yes to all of them , I expect... Thats the challenge. ?


If we see the trend we know the trend, if we know the trend then we know which way to bet. CB

And to me that sums it up.
 

new_trader

Legendary member
6,224 1,271
We do not know whether our strategies truly work... how do we know if we have just been 'lucky' verses by 'smart'.
Observation and experiment which yields consistent & highly predictable results.

The point I am making is the following? "When do you truly know that your system is correct."
You will know when you have followed the proper route. There are no shortcuts.
 

miriambrown

Newbie
0 0
Microsoft Exec in boiling water for lacking discipline...

Obviously this Microsoft Exec. and his friend lacked the kind of discipline you wrote about and knowingly failed to follow the rules. Is there any wonder they are both in boiling water?
http://bit.ly/JYZajA
 

Tytus_Barnowl

Member
92 7
I have a few more rules than described above, the key point is in the last paragraph. The individual trader needs to confront his individual strengths and weaknesses. Then have a strategic plan to deal with the weaknesses once the trading floor is hit. Forget your strengths, people will naturally play to those, just concentrate on the things you consistently are bad at.