|When you start down the path of trading the financial markets for a living, you are introduced to many phrases that are considered to be sacred truths. These phrases include: |
·"Buy low, sell high"
...and so on. All these are quite true and should be the mantra of every serious trader. But they are useless if you do not actually use them. Many traders know them by heart but fail to apply them because they lack self-discipline.
It is easy to lose sight of these truisms in the fast-moving markets that flash before us on our workstations. Sometimes the amount of information can become overwhelming. Our adrenaline level rises once we have pulled the trigger and we have put our money where our mouth is. This fight-or-flight instinct can make us go into a state of fear or greed that could cloud our judgment and turn a good entry with profit potential into a losing trade. Only self-discipline can keep us focused.
Discipline is a systematic effort to obtain obedience and submission to rules and authority. In a military setting, it sets methodologies for acting and reporting within a hierarchical chain of command. In an educational setting, discipline could be defined as the submission of the student to the teacher's instructions. These two examples have one thing in common: accountability to someone above us. The lieutenant has to report to her captain, the same way the student must comply with his teacher's request for homework. The power of discipline lies in the need to keep our superiors happy because of the rewards and punishments they hold over us.
But what happens when we substitute the authority figure with ourselves? The temptation to procrastinate creeps in. Since there is no other person to whom we are responsible, we tend to forgive ourselves for small deviations from the established procedures. It may be no big deal to cut a corner here or there since the only person we need to keep happy is ourselves. Instant gratification becomes a real option.
There is always in our heads a little voice that wants to have it all and have it now. It wants to tempt us into having an extra slice of pizza, or that extra drink during happy hour. It is this alter ego that triggers the emotions that can sabotage an otherwise profitable trading strategy. It can drive fear into us as our position rushes to its stop-loss. And it is this same little voice that makes us feel invincible when our trades have given us extraordinary profits. If we allow this side of ourselves to take charge, it will guide us into the ground by exiting our positions either too early or too late.
OBSTACLES TO SELF-DISCIPLINE
Self-discipline forces us to become our own authority figure. We must give priority to the long-term goals over the instant gratification impulse. Otherwise, it will fight us all the way by throwing emotions into the mix. It will use powerful obstacles to get us to deviate from trading our plan. In short, it uses our emotions to sabotage our trading so we can go back to being spectators instead of players. These emotions include fear and pessimism on one side and greed and hubris on the other.
It could be easy to say that in order to avoid this self-sabotage, we must become ascetics and starve our alter ego. This would be a mistake because our ego is also responsible for our creativity and enjoyment. That child-like desire it has for idleness is the reason we enjoy our weekends by the pool or in the mountains and the reason we feel joy when executing a winning trade. We must not kill it for the sake of profit, but instead balance it out. Here are a few tricks to do so:
It does not matter what trading system we use; if we allow a part of ourselves to fall victim to sabotage, we will fail. Even if we use a highly sophisticated econometric model derived by using an expensive artificial intelligence package with neural networks and genetic algorithms as our trading system but we don't follow its signals, someone with discipline using a moving average crossover technique will beat our performance. All of us have an inner conflict between long-term satisfaction and instant gratification. It is possible to balance these out if we acknowledge their existence and importance and play them against each other.
Roberto Chahin is a business and personal financial advisor who is now a full-time trader based in Tegucigalpa, Honduras. He may be reached at firstname.lastname@example.org.
RELATED READING Bryant, Theodore . Self-Discipline In 10 Days: How To Go From Thinking To Doing, HUB Publishing.
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