Why Can't Trader Bill Win? Discipline.

04/13/2017 2:45 am EST

Focus: STRATEGIES

Jake Bernstein

Publisher, The Jake Bernstein Online Weekly Capital Markets Report and Analysis

In this second of three articles, Jake Bernstein outlines trading discipline. He’s the longtime publisher of The Jake Bernstein Online Weekly Capital Markets Report and Analysis.

Trader Bill leaves Dr. Mosley’s feeling dazed and confused.  Sometimes a door once opened can never be shut again. He feels as if his world has been turned inside out. He never considered the possibility that virtually every failure in his life has somehow been related to a lack of discipline.

What’s worse, most of his trading failures have been a result of poor discipline.

Nonetheless, Bill is not a quitter. He has diligently (even religiously) spent three to five hours almost every day in front of his computer, studying charts, analyzing prices, visiting internet chat rooms, trying to understand earnings, fundamentals, Elliott Wave, Gann, Fibonacci, Wheeler’s Clock, Kondratieff, Greenspan’s briefcase indicator, candlestick patterns, and all sorts of arcane stuff.

Still, he’s been a failure in trading.  He remembers something a broker once told him about trading. “If you sell it you lose, if you buy it you lose, but if you don’t trade you’ve missed a great opportunity!” He feels like the poster boy for that epigram.

Persistence or even brute force in the wrong direction or in the darkness of confusion leads nowhere. Bill decides to resolve his dilemma with clarity and knowledge. He searches the internet on the terms “discipline” and “trading discipline.” He finds over 29 million results! Paraphrased to protect the purveyors of the nonsense he discovers, here are a few of the suggested solutions:

  • have a plan, stick to it, plan your trades and trade your plans
  • evaluate your performance regularly and learn from your mistakes
  • understand why discipline is important
  • emulate the style of great traders
  • cut losses quickly
  • ride winning trades as long as you can
  • understand your reasons for buying and selling.

And the stuff just drones on and on from there. The problem with most of this stuff is like trying to explain to a colorblind individual the difference between red and blue. Any attempt to instill or develop discipline must begin with a definition of discipline.

The good news is we have a definition. The bad news is that no matter how well you stick to the rules, no matter how much you think you are following the advice above or your trading strategy, the lowest common denominator is the efficacy of your rules. Following rules, keeping good records, understanding your reasons for buying and selling, understanding your failures and successes, evaluating performance, are all useless if you are using a trading strategy that loses money!

The first step to finding discipline is to find strategies that make money. And these are few and far between. To have discipline with a losing strategy is tantamount to insanity. The disciplined trader following a losing strategy will ultimately need Dr. Mosley. Sadly, many lack effective trading strategies. By effective I mean winning. Show someone something that wins a good percentage of the time and discipline will most likely follow. Yes, it sounds simple. Yes, it sounds naïve. Yes, it is basic. And yes, it’s the best answer for most people. Why?

Consider the fate of the typical trader. Enthusiastic and full of financial candy canes in their minds hundreds of new traders enter the markets daily. By the time they begin trading they have been sold on all sorts of ideas about trading, most of which lack validity and most of which require interpretation. They can lead to numerous interpretations. The deck is stacked against the new trader from the get-go.

Nonetheless, they believe what they read. They make a trade. Most likely the trade loses money. Disappointed but not ready to quit the new trader understands that this is not a game of 100% probability.  

And so, the trader trades again, this time agonizing somewhat more about the decision and feeling frustrated that somehow the rules of what he is doing aren’t clear. Again, the trade loses money.

Now it’s getting serious. What am I doing wrong, he thinks? He started with $15,000 and now he’s down to $14,000 but the game goes on because he thinks he has discipline.  He makes another trade this time being more careful about his decision-making. It begins to work! He’s $300 ahead.  But soon the $300 profit has declined to $225. The next morning the $225 profit is $75. As the profit erodes, he pulls the trigger and exits the position before the profit turns into a loss. After all he read that somewhere “never let a profit turn into a loss.”

And so the process of undisciplined trading and emotional response begins to develop. The next day the trade gains $683, but he is out.

How to break into the cycle?

Come back next time for part three. Best of trading.

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