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;
- 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 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.