Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
The Importance of Discipline in Market Timing
02/17/2017 10:30 am EST
While following the emotional crowd may take away the pain for a short while, Frank Kollar of Fibtimer.com doesn't think it is the path to profit. Instead, Frank uses a literary analogy to explain why he feels that only those traders committed to following an unemotional timing strategy will stay the course.
The winning market timer is the disciplined market timer.
Sounds simple. And everyone should find this 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 sell-offs 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.
Discipline vs. Emotions
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 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.
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 able to show discipline when completing a specific task, such as executing a trading strategy. To read the entire article click here.
By Frank Kollar, Editor, Fibtimer.com
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