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Discipline in trading – mental discipline

When it comes to trading, discipline comprises of three core components: Mental, Technical and Physical discipline. The trading fraternity often talks about discipline being a requirement to be a successful trader so over the next 3 weeks I am going to examine discipline in each of these areas and discuss what is involved with each one. This week we will start with mental discipline.

But let’s first look at the dictionary definition of the noun ‘discipline’:

  • training to act in accordance with rules;
  • drill;
  • activity, exercise, or a regimen that develops or improves a skill;
  • behaviour in accord with rules of conduct;
  • behaviour and order maintained by training and control.

When reading through these blog posts on discipline it might pay to return to this definition of discipline to help gain deep understanding of what discipline actually means. In my view it is misunderstood in the trading fraternity and hence regurgitated and used loosely by many market educators without really knowing what they are saying.

Mental discipline

Mental discipline firstly requires total acceptance that:

    No-one knows with a 100% certainty what will happen next in the market.

Meaning that no one knows how much money will be made or lost on any signal trade when a position is opened in the market. To help with achieving this acceptance a trader needs to have a mental framework that absolutely believes that “anything can happen” and that “every moment in the market is unique” (Mark Douglas).

Once this is accepted the trader or investor can focus on what is known and the effects that can be controlled.

The things that are known need to be entered into a trading plan. Amongst many other questions, the trading plan should answer these main ones:

  • Why you are investing in the stock market?
  • The results you hope to achieve from your investments?
  • The timeframe for you to achieve them?
  • How much money you will invest in the market, invest within the strategy or invest in each individual trade?
  • How much money you will risk?
  • The system or methodology or framework of guidelines / rules you will use to engage the market in order to achieve objectivity and consistency in your trading and investing business?

Every successful trading plan defines its Mission, Goals and Objectives, Strategies, Action Plan etc. Your Trading Plan is the one critical document that will keep you on course but you are still required to have the mental toughness to work within the predefined framework of the trading plan.

The trading plan contains the regimen required to ‘develop and improve’ the skill of trading, it contains the ‘rules of conduct’ to behave in accordance with, it provides the ‘order’ in a chaotic environment by stating the things that you can control.

The markets can be a tough environment for those who are not fully prepared mentally for the challenges that will arise as a result of participating in an arena of un-known’s. It is virtually impossible for anyone to know what the market will do next – be it the next minute, hour, day or week. The only thing we can truly ‘know’ is what we must do, how we must react, when something does occur in the market. With the use of a system and a well developed and documented trading plan we can determine how we will react to whatever the market throws our way. This provides us with the mental discipline required to continually engage the market and implement trades consistently over time despite what may be going on around us.

As traders and investors we will be constantly challenged by all that the market can throw at us, and at times it can be tough going. It is during these tough times that your mental discipline will be challenged by lots of negative feedback in the form of loss trades and the importance of being disciplined will come to the fore by adhering to risk management rules. It is during the tough times that the best traders and investors are ‘made’. Being disciplined means “behaving in accordance with the rules of conduct” stated in the trading plan.

During raging bull markets when prices are on an upward trajectory, and everyone is buying shares and profiting from the experience, being disciplined is far easier because the trader gets lots of positive feedback in the form of profit trades. Once tougher market conditions hit these would-be traders are left battered and bruised by the market whilst those with a plan and the mental discipline will not only survive, but prosper as they benefit both personally and financially from the advantages of being disciplined.


  • DV says:

    Mark Douglas’s concepts are golden and yes anything can and does happen – and every moment is unique, and I too believe that the best traders are forged out of tough trading conditions, It certainly weeds out those who are not mentally fit for the markets very quickly… Nice Article!

  • Luciano Giangiordano says:

    Thanks again Gary for the timely reminder …. after cruising through Nov to Jan I’ve been struggling a little in my traes as have others. This posting has helped me put things back in perspective.Much appreciated.

  • Damien Byrne says:

    Gary I would be interested in your comments in relation to what one hopes to achieve and the time frame. In my trading plan I set out a goal of 15% return and a time frame of one year. The time frame is up and the return is -5%. I understand this is what the market does so do you adjust the expectation or the time frame or both.
    I enjoy reading your journal

    • Gary Stone says:

      Response to Comment by Damien:

      Some important points:

      1. We cannot get from the market what is not on offer. Hence, market conditions are the biggest factor in determining what returns we get over any given measured period.

      2. No method will always outperform its benchmark in all market conditions.

      3. Regardless of what timeframe a method trades in, returns are always measured over the long term. This is because our portfolio returns are linked to how long we live but the method that we use is linked to how we wish to engage the market within the contraints that we have as individuals.

      This means that even an intraday day-trading system must still be measured over years not just a few days or weeks.

      With SPA3 ASX the bar is high. We aim to outperform the ALL-ORDS by 10 – 15 compounded percentage points over a rolling 5 year period. It is high because there are very few managed funds that outperform the ALL-ORDS by 4 compounded percentage points over a rolling 5 year period.

      Wrt to performance objectives, other factors include what exchange is traded, its volatility, liquidity, what instruments are traded etc etc.

      4. The main reason that performance goals are set in the trading plan is to help investors determine what markets, instruments, methods will need to be traded to achieve their required goals. E.g. an annual goal of 50%, to illustrate the point I have chosen an extreme, would be impossible trading unleveraged stocks in the ASX200.

      It doesn’t mean that goal will be achieved in any given year because market conditions will play a big role in what is actually achieved. As will all the things that we discuss on this blog such as edge, psychology, trading errors etc.


  • jock holland says:

    Gary Thank you for the article – useful definitions of discipline.
    I sometimes think traders ‘measure of success’, might be done by focussing on the extent to which we comply with our trading plan, not on our equity curve. One out of one for full compliance for each buy or sell. Minus one for deliberate/neglectful non compliance. See how the %age tracks every six months or so. Regards Jock Holland

    • Gary Stone says:

      Response to Comment by Jock:

      Excellent comment Jock. I couldn’t have said it better.

      We can control how well we execute our processes but we can’t control the outcomes that we get. Why? Because there are far more variables at play than we can control – whether it be trading, business or on the golf course.

      However, if we execute our processes well, we will find that our outcomes have the highest probability of being the best that they can, at our individual levels of development on our respective journeys.


  • Michael Cullen says:

    Gary, not one word out of place, as usual. It starts with writing it down as you say, and it ends up ingrained in your nature.

  • Stephen K. says:

    Hi Gary I just wonder if every moment in the market is unique then is there a risk of a trading system like SPA3 losing its edge or going out of date, so to speak.

    • Gary Stone says:

      Response to Comment from Stephen:

      Whilst every moment in the market is unique many price patterns repeat themselves time and time again. I have researched patterns that have occurred over the last 10 years that occurred in the early part of the 1900’s and in the middle of the 1900’s and again in the 1970’s, 1980’s and 1990’s. Every time the price action of the bars that comprised the pattern was unique but the overall pattern still provided a signal to enter the market .

      There are all sorts of risks in the market including any given methodology losing its edge and ceasing to work, at least for a period of time.

      Indeed, one uses a methodology to minimise most of the risks that exist in trading.

      Nobody can foresee the future so I cannot provide a definitive NO to your question. All I can do is point to track record and the transparency of SPA3’s rules and processes. It has proven itself over a 10 year period in all sorts of trading conditions. The question therefore becomes what type of conditions need to prevail to totally negate SPA3’s edge forever (or any edge for that matter)?

      SPA3, like any edge, has drawdown, it is not always in sync with the market so sometimes underperforms the market (two notable periods in 10 years), mostly outperforms the market in down and up markets and through its positive probabilistic edge continues to widen the gap between its portfolio equity curve and the market.

      It is during the times of drawdown that one’s trust in any system is tested as human beings default to negative thoughts during times of trouble and have difficulty perceiving favourable times again when in the middle of tough trading conditions. The challenge is continuing to trust and operate from a neutral, objective and carefree (not careless) state of mind.

      Lastly, the perennial knockers of mechanical trading always state that market conditions will change at some stage in the future that will eventually negate any edge. Nobody has yet to prove this one way or the other. In fact, there are many high profile traders that maintain the exact opposite because it is not the market that has to change to negate an edge but human psyche which has been proven by scientists is still locked in a time warp catering for life on the planet thousands of years ago.

      In the meanwhile each trader has to deal with what is occurring right now, not what may or may not happen in many years time.


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