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;
- Trading positions that are excessive for the account size – This is much more common than is usually acknowledged. It creates exaggerated P/L swings and emotional reactions that interfere with cool, calm planful behavior;
- Not having a clearly defined trading plan/strategy in the first place – Interestingly, many traders do not consider themselves to be discretionary traders, but in fact do not have a firm, explicit set of trading rules that they follow. It is difficult to be consistent with a plan (and to evaluate your consistency), if you don’t have the plan clearly laid out;
- Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality – All too often, traders veer from their plans because those plans are ones that they feel they *should* follow, but that don’t truly come naturally to them. These departures from discipline are actually unconscious attempts to trade in a style that is more in tune with the trader’s skills and talents.
As you can see, not all discipline problems have their origins in the trader’s psychology. Many times, the loss of discipline reflects problems with trading itself. Discipline in trading is not so different from “discipline” in a romantic relationship: if you’re doing the right things, there’s little need or desire to stray. But if your trading is not meeting your needs, it’s all to easy to break your trading vows!
Brett Steenbargar can be contacted at Brett Steenbarger