Last updated on April 26th, 2020
It’s commonplace for traders to regularly lose money by trading in a manner which they know they shouldn’t be which means they are not following their trading plan. This is assuming the trader has taken the time to actually put together a trading plan for their strategy based on testing and statistics.
When markets change their type of activity and start moving quickly for example, traders who are slow to adapt to these shifts can get caught out and in the frustration of the moment, start to trade erratically.
Discipline and self-control are not present and in the end, this can lead to a disaster for their account and psychology.
This is just one possible example of where a trader might feel they need to exert more trading discipline and control.
What’s My Trading Setup?
Trading setups are part of the equation and although many traders spend too much focus on that one aspect, many don’t know what their trading setup is. I am talking a precise definition of their setup that tells them when to take a position in the market.
You have probably heard traders talking about how they’ll take a position when they “like the look” of the market. That problem is pretty much endemic in the business and in particular, the retail world.
People just don’t have a clear enough plan to trade the market.
It doesn’t matter if your setup is based on technical analysis or a candlestick chart pattern, if your trade plan is ambiguous or even non-existent, you might be able to get away with it for a little while. When things start to change and the markets heat up, it’s a mammoth task to maintain a clear idea of how you’re trying to trade.
When a trader loses focus, loses their trading discipline, one loss will begin to turn into many losses.
Laser Focus Can Be A Problem
Focus and being in the moment as a trader is a great trait to have and can be a powerful influence on your trading success. It becomes an issue when that focus is too much and you start to lose track of what’s going on outside your little window.
I used to trade with a guy who blocked off his day entirely into 30 minute periods in order to maintain his focus.
That becomes a problem when the bigger picture of the market is being missed by the trader. Do you know who trades those larger time frames?
Big players. Those who move the market don’t get caught up in the ebb and flow of smaller time frames. The big time frames – the daily chart, weekly chart, and even the monthly chart is their trading domain. These higher time frames can have a huge impact on the market changing gears.
If you are trading an intra-day chart and you take a trading position long into a higher time frame resistance area, what do you think will be the probable outcome?
A rule of thumb is to expect support and resistance to hold until proven otherwise. That intra-day long will probably end up pulling against you.
Keep A Lid On Your Chimp Brain
You do not have an never ending stream of discipline or willpower. There will be a time that a lack of trading discipline is front and center and you must have a way to deal with it.
What happens is that as you have to make more decisions and your energy levels drop, you become more susceptible to decision fatigue.
“As it turns out, your willpower is like a muscle. And similar to the muscles in your body, willpower can get fatigued when you use it over and over again. Every time you make a decision, it’s like doing another rep in the gym. And similar to how your muscles get tired at the end of a workout, the strength of your willpower fades as you make more decisions”. – James Clear
If lots of things are happening in the markets and your trade plan is a tad ambiguous anyway, there are two big problems as decision fatigue sets in.
- You’re less able to make sense of what is going on in a timely manner and obviously as volatility picks up, acting swiftly can be critical at times.
- Due to the ambiguous nature of your trade plan in the first place and the fact that you’ve probably had some losers that session and at the very least, some close calls, your Chimp brain starts to erode the control that your Human brain has.
Taken to the extreme, decision fatigue can lead to fear – flight or fight – and that is not a state conducive to a proper trading approach.
Is More More Trading Discipline The Answer?
Do you really need more trading discipline to follow your trading strategy? Well I can’t say for sure as each person is different, but certainly for most people this isn’t the right place to start.
The right place to start is to assess your trade plan for clarity. Then you need to on a daily basis, plan for and pay attention to what the bigger picture context of the market is in order to make sure you’re aware of any changes in the market.
If your trading plan is clear and the number of actual decisions you need to make are lower, that can only be a good thing for a trader. If you are a day trader where you face many decision during your trading session, you are at a bigger risk of decision fatigue than a swing trader.
Having a trading rule for virtually everything you can encounter during your trading session is another burden lifted from your decision making muscles.
These factors won’t eradicate the chances that you’ll lose your discipline, that risk is still there, but they are a good step forward for successful trading.
Be Aware During Your Trading Session
What can be really beneficial in sensing the balance of power within your own mind is using the strategy of practicing mindfulness as you trade. The issue is that when there’s more action you’ll naturally want to sit at your desk for longer.
“Mindfulness is the basic human ability to be fully present, aware of where we are and what we’re doing, and not overly reactive or overwhelmed by what’s going on around us.” – www.mindful.org
Unfortunately, this is only likely to make you more susceptible to mental fatigue and therefore decision fatigue. In turn, your Chimp might show up and that’s clearly something to avoid if at all possible.
Mindfulness can help you to maintain self-awareness and get you to take more breaks than you normally would so you have the chance to recharge.
So before you start thinking you’ve just got terrible trading discipline, be sure to take a proper look at the circumstances under which you find you’re losing it first.