Following on from the interview with Kel Butcher the week before last and last week’s topic on applying knowledge, I would like to discuss the importance of the role that discipline plays in trading.
Discipline is a critical technique that we use in life to build and ingrain habits. We require discipline to engender change in how we think, how we behave and ultimately in what we believe. Whether trading the markets, making the decision to loose weight, desiring regular exercise or wanting to have a few less drinks of a night, the first link in the chain is to define a process before applying discipline. Discipline is required to execute the process to be able to transform to your desired end goal. Quite simply, discipline requires process and process requires discipline. The two work hand in hand during the initial stages of any transformation activity.
It is important to make the point that discipline is not the end goal, it is merely a technique that is used to achieve the end goal. The end goal, no matter what the activity, is to achieve consistency in that activity at the level that meets your desired objectives.
One cannot suddenly become consistent in a given activity. Consistency is achieved in an activity when executing the activity becomes effortless and requires no struggle, strain or pain. Once consistency is achieved the overall outcome will be successful on an ongoing basis and discipline will no longer be required as the process will have become ingrained as a habit.
In the heady atmosphere of the stock market, being consistent and objective is not only absolutely essential, it is the foundation to success. Yet the great majority of traders are inconsistent and subjective — exactly opposite to how they should be for trading. Worse still, in an inconsistent and subjective state of mind it is virtually impossible to measure how consistent and objective you are with your thoughts and actions.
This is why I am so passionate about mechanical trading. The rigour and structure of a mechanical system combined with applied discipline, enforces us as investors to put our discretion aside and follow a process that can create a habit of consistency and objectivity in the activity of trading. I personally struggle to understand how the masses buy and sell shares without the call to action of a mechanical decision support system.
The vast majority of traders and investors fail in their endeavours due to a lack of discipline. They spend an enormous amount of time researching systems and trading styles and refining their entry and exit techniques, and after much debate and deliberation finally decide to have a go at this trading caper. They start off full of confidence and buoyed by the rhetoric delivered by so many supposed experts and market educators. Full of this confidence, they can’t believe it when their first trade or first few trades are losers! Annoyed, but not devastated by this chain of events, they decide to stop trading for a while. Low and behold the next 3 trades are winners, but they aren’t in them. Seeing that the ‘system’ has produced a winning streak they decide to re-enter the market and you guessed it, they hit another losing streak and this time give up or turn to a new and ‘better’ strategy in an attempt to rectify their poor trading results.
The lack of discipline to follow a process in trading and investing (like the lack of discipline to do regular exercise) manifests itself in a myriad of ways and forms. Those without a disciplined approach to their trading and to life in general constantly struggle their way through unable to make any clear headway or to make the progress and the profit they know is possible but they just can’t seem to break through to their desired level and profitability. In short, they remain inconsistent and subjective, flowing with the noise of the market. Such people need to get disciplined as a first step!
Those that do reach a level of above average profitability are typically disciplined with their trading, and more often than not, with their lives in general. They are able to maintain a level of consistency and their trading is uncomplicated and struggle-free. They have a strict set of rules or guidelines that they deploy to help guide them through the maze that is the financial markets and they stick to the rules unequivocally. They are able to do this because they fully understand and trust the process they are using. They know and understand the range of possible outcomes of their system and they accept and trust the edge that it gives them over the market and over the majority of undisciplined market participants.
Applying discipline to execute the processes of your trading edge as flawlessly as possible will not only greatly improve your performance, but will ultimately lead to consistency which will, in turn, decrease stress and anxiety, and result in a calm and relaxed acceptance of the outcome of each and every trade regardless of the outcome – win or loss. As Kel Butcher also said in his interview this is a life long journey, not a sprint.