What “The Odd Couple” Can Teach Us About Trading Discipline
12/17/2010 12:00 am EST
“The winning market timer is the disciplined market timer.” That sounds simple, and everyone should find that sentence easy to agree with.
Basically, it just means following a specific trading strategy and not deviating from it. But people differ in terms of their ability to maintain self-control and discipline.
How are you handling the current volatility? Are you agonizing over selloffs and feeling great when the market rises?
There is nothing wrong with these emotions…unless you act on them. That is the reason why non-discretionary timing strategies work. If you follow them, no emotion is involved and you are relieved of having to make emotional decisions.
You just follow the trading plan.
Disciplined Trading vs. Emotional Trading
It is easy to maintain discipline with a market timing strategy when that strategy is having a profitable run. But all strategies have times when they are not profitable. This is a fact of trading the markets and is accepted by profitable market timers as the price of doing business.
However, when a strategy is going through an unprofitable period, maintaining discipline is something else again. A trader, seeing losses in his portfolio, tries to find a reason why exiting the strategy is a good idea. Anything to take away the pain.
The problem is, exiting a proven strategy is almost always going to cause much more pain.
Exiting is an emotional decision, and the stock market runs on emotions. But that just puts you in with the crowd, making buy and sell decisions according to how you feel.
Following the emotional crowd may take away the pain for a short while, but it is not the way to profit.
Felix and Oscar
As you may have casually observed, some people are very disciplined, while others are undisciplined.
Neil Simon's characters Felix Ungar and Oscar Madison illustrate the stark contrast between the disciplined and undisciplined.
Felix was a neat freak who wanted everything in its place, while Oscar was sloppy and more impulsive.
But there were times when Oscar was extremely disciplined. He was a well-known sports writer and he must have shown an acceptable amount of self-control in order to put out his column every day.
Although he was a fictional character, Oscar shows how it's possible to be undisciplined in terms of personality traits, yet be able to show discipline when completing a specific task, such as executing a trading strategy.
Discipline Equals Profits
Keep in mind that you don't have to be disciplined all the time. You only need to be disciplined when you are executing a buy or sell signal. It sometimes helps to remember this fact. It eases some of the pressure to think that you only need to be "disciplined" when you execute a timing signal, rather than during all waking hours.
Don't minimize the importance of self-control and discipline. The more disciplined you can trade, the more profits you will realize over time.
The urge to ignore a buy or sell signal, or even exit a trade because it is not currently profitable, can be very strong, and often only those traders committed to following an unemotional timing strategy will stay the course.
But when the big profit-making trend begins, if you do not take the trade, you will be left by the wayside. Because it is impossible to know ahead of time when that major trend is going to start, you must take all the trades.
Last year's huge rally started after a record-breaking bear market. The stock market was in disarray. Many traders and market timers had given up.
When the rally started, no one knew it was the rally that would keep going higher. It was just another buy signal. But this time, the trend just kept rising without looking back. Those timers who take all trades were on board from the beginning.
This fall's rally was not expected by anyone. But those using a good trend-following strategy, like Fibtimer's, are in it.
If the majority of stock market investors and traders had the ability to stick with a good timing strategy, most would be rich. Because that is not the case, we know that many market timers as well as traders fall by the wayside.
Don't be one of them.