Self-Control & Trading

The market is ruthless and unforgiving.

It punishes even the best traders for making even the smallest mistakes. The only redeeming aspect of this side to the market is that it affects all traders equally. No one gets special treatment. If you screw up, you lose your money, and there’s nothing you can do about it.

Unless of course you are a major Wall Street institution, in which case you can rely on the Fed or Warren Buffet for bailout money. But most of us don’t have that luxury and we actually need to protect the capital we are managing.

That means we need to keep ourselves under control every time we sit in front of our charts.

Eliminating Big Losses

When I first started “trading”, which is to say, when I first started throwing my money around like an idiot gambler, it didn’t take me very long to notice a pattern.

Every now and then I would stumble into a big winner or a winning streak and make a lot of money in a week.

But then in a single trade, or a brief losing streak, I’d give it all back and some. I noticed the pattern in my equity curve – periods where it would climb impressively and then suddenly nosedive into new lows and deeper drawdown.

I quickly realised, with the help of YouTube, that I was trading completely opposite to how I should have been. When I really thought about what I was trying to achieve with my trading, I realized that the ultimate goal was to accumulate profits.

Not to catch big winners or to be right all the time, but simply to make more than I lose as often as possible and then keep those profits.

It seems so painfully obvious now that I am several months into disciplined consistent trading, but at the time it was a huge epiphany: all I needed to do was eliminate my big losses and reduce my frequent losing streaks and then allow my winners to accumulate over time.

This turned out to be much, much easier said than done.

Accepting Loss

It seems counter-intuitive, but what you need to do in order to eliminate big losses is learn to accept small losses. Learn to embrace losing trades, do not fear them. They are merely the cost of doing business as a trader.

Now when I lose a trade, most of the time, I feel absolutely nothing. At first I feel a slight tinge of disappointment or sometimes frustration during a losing streak.

Okay, maybe every now and then I might mumble “fuck you” at my charts. My girlfriend has come to accept that sometimes I’m going to argue with the markets.

But I never become completely unhinged. I never pass the blame. I never revenge trade. I never make stupid decisions following a losing trade. I never lose my cool. I never let a losing trade or streak of losing trades ruin my day.

This took many months of daily practice. I had no shortage of losing trades in my first year, so becoming desensitized to them was actually pretty easy once I began managing my risk properly.

Losing 1% on a trade is disappointing but losing 10% on a trade is absolutely devastating. Once I stopped losing that much on trades, I stopped being afraid of losing altogether and was suddenly free to make better trading decisions.

Once you thoroughly understand the importance of eliminating big losses from your trading (ie. “risk management”), developing and following a trading plan makes a lot more sense and quickly becomes your best friend.

The main purpose of a trading plan is to take full responsibility for your trading results. No longer are you at the mercy of the markets, but the mercy of your own performance, which is a much better place to be in.

The better you get at performing your job as a trader (ie. sticking to your plan consistently), the better your results will get over time.

And the more experienced you become as a consistently profitable trader, the better your trading plan will become (in turn, making you more money).

This is a competitive game of perpetual personal evolution with uncapped reward potential. Only those who are genuinely enthralled by the opportunity will succeed, and anyone with false or weak motives will fail miserably.

It is a slow process, but if you take the right approach and stay focused on developing the correct habits through deliberate practice, then you can overcome whatever hurdles you face now and improve as a trader over time.

All it takes is your total commitment to becoming a better trader.

Plan Your Trade, Trade Your Plan

After my first few months of trading every day using sensible risk I developed a new problem. I noticed that the market’s behaviour tended to make me doubt myself constantly.

I’d see a swing-trading opportunity that looked great with a huge reward-risk ratio, I’d enter the position, then an hour later I’d notice that price was slowly moving against me.

I’d begin to doubt the trade and come up with a reason to exit it, then I’d close the position for a loss – only to wake up the next day and see that it would have won.

This was a frequent occurrence that became incredibly frustrating. Over time, I realised that the problem was not the market but myself. The market was producing infinite opportunities for me to make profitable trading decisions, but I just wasn’t yet equipped to make the right decisions.

I had no plan. I had no conviction in what I was doing. And why should I? I had no evidence that what I was doing was actually going to work, so when it didn’t work, I certainly had no reason to be surprised.

That’s around the time I began reading a lot of trading psychology books such as Trading In The Zone by Mark Douglas, and signed up to a forex educational course.

The first and most helpful course I signed up to was Steven Hart’s EAP Program (TheTradingChannel), where he teaches you the objective rules of his personal strategies and how to develop your own trading plan.

No fluff, no hype, no promise of riches. Just hours of monotonous, repetitive, hard work (and a lot of spreadsheets).

Every week he would email his students examples of trades he was taking so that we could watch over his shoulder and see how he analyzed the markets and applied his strategy in real time.

These were not intended as trading signals to copy, but rather he did this in order to make sure that we were executing the strategies we were learning correctly.

Before long, I began ignoring the emails altogether, because I found that I was already involved in the trade before he sent them out.

The Reality of Drawdowns

The last piece of the puzzle for me was developing the courage and discipline to endure drawdowns. That was where I struggled for a while, but Steven’s guidance helped me overcome that fear.

Every few weeks he would review each of the trades he had taken and analyze his equity curve, drawdowns and all.

What he taught me throughout this process was the importance of consistency. At the end of my first year in the EAP program, he ended up with a 126% return, but went through several small but prolonged drawdowns to get there.

At one point he was down over 15%, which was his worse drawdown ever, and it was very interesting to watch him trade out of it simply by following the plan.

It gave me a huge amount of confidence in myself when I finally understood what he was doing. After watching him demonstrate how it was possible to eliminate almost all the mistakes I was making from my trading, I thought to myself confidently, I can do this!

And I did do it. And I am continuing to do it, and it gets a little easier each day.

Like all fears, the only way to overcome your fear of drawdowns is to face them head-on. The reality of trading is that most of the time you will not be at new equity highs, but slowly grinding towards them.

Accept that reality, prepare for it psychologically and with your position sizing, and before long drawdowns will become just another routine part of your process that cause no disruption to your performance.

Tips for Trading Discipline

Developing trading discipline is much easier if you know why you’re doing it.

I am embarrassed to say in detail exactly how undisciplined I was before I began trading. It is not something I am proud of, and I had many great excuses for it.

But through sheer determination and commitment to my goal, I have become more self-disciplined both in trading and my personal life than I ever imagined I was capable of being.

Learn the Theory

The first step I would recommend any new trader take along the path to developing trading discipline is to learn a bit about probability theory in relation to trading. Thoroughly understand the dynamics of win rate vs. risk to reward ratio.

Knowing this will help your motivation. If you don’t understand your edge or know why trading discipline is important in order to effectively express it, then you won’t ever find the inspiration to develop it.

Find Mentors

Watch other traders that have demonstrated an ability to trade the markets successfully and pay attention to the objective things they do which you can copy. Don’t copy their process or their trades blindly, but take notes from their style.

I have written an article with tips on how to find your perfect trading mentor which is worth reading if you are on the market for a new mentor.

There are a handful of great mentors out there, some of whom share their insights for free. Mike Bellafiore and Steven Spencer from SMB Capital is a great example of this, as is Akil Stokes and Jason Graystone from Tier One Trading, Steven Hart from TheTradingChannel, and Rayner Teo from TradingWithRayner.

Also read all of the best theory on trading psychology. There is some great stuff out there by masters such as Brett Steenbarger, Mark Douglas, Denise Shull, Ari Kiev, Mike Bellafiore, Jack Schwager etc.

Kaizen Approach

Discipline is not something you develop as a trader. It is something you must develop as a human being. This takes time. It is a process and it can be quite uncomfortable.

The best method I have found for developing consistency and self-discipline is through Kaizen, which is a Japanese philosophy that advocates continuous incremental improvement.

I am going to write an article about this concept soon, but the idea is that you are more likely to stick with small changes and turn them into habits than you are radical changes.

Pick small problems with your trading and focus on improving them incrementally. Start with one thing at a time and grade yourself throughout the week on your progress.

Once you truly overcome the problem and replace it with a better habit, move on to the next problem and repeat.

Never underestimate the power of this approach. And also learn to apply it in other areas of your life. If you are undisciplined with your lifestyle and you party whenever you want and sleep in late and neglect other priorities (for example), then your trading will no doubt suffer.

You can still have fun and trade, but don’t think that if you live an undisciplined life then you will still be a disciplined trader. It does not work that way.

This is my most favorite part about trading by far – the work you put in to become a better trader will make you a better person too.

Self-Awareness

The most fundamental prerequisite to self-discipline is thorough self-awareness.

If you are not honest with yourself, if you are either far too hard on yourself or far too easy on yourself, then becoming disciplined will be an impossible challenge.

Developing self-discipline is a process. You need to know when to let something slide and when to reprimand yourself either literally or figuratively.

If I miss an A-grade profitable trading opportunity because I was doing something important that I committed to with my friends or family, such as seeing a concert or attending a wedding or a birthday party, I let that go.

That’s no big deal. Of course there are many things in life that are more important than making money and you can’t catch every winning trade.

But if I sleep in late and miss a valid setup, or I screw up a trade and lose more money than I should have due to some silly avoidable mistake, that is unacceptable. That requires attention. That is not something a professional trader lets slide.

Sometimes if I break my trading rules or make a blatant error, I walk straight out of my office into the backyard and jump right into my pool with my clothes still on to punish myself. The shock of cold water is usually enough to knock some lasting clarity and sense into me.

Of course, this doesn’t work in summer, so I have to get creative during the warmer seasons. But you get the idea.

It’s also wise to do the same thing with rewards. I set desired milestones in my trading, and when I achieve them, I take my girlfriend out to an expensive restaurant or we go on a short holiday somewhere nice and spoil ourselves to celebrate.

But only once I have achieved the milestone. Until then I work as hard as I can to get there and I don’t let myself get complacent.

The moral of this story is that you know what works best for you, so take advantage of that. This is the best part of being an entrepreneur.

It is fun to get creative with your self-discipline and motivation. Unlike other more stable professions, the most beautiful and yet terrifying thing about retail trading is that you are responsible for yourself, completely and utterly, without any supervision.

If you do not take self-discipline seriously then there are no consequences besides your failure as a trader. It’s up to you.

Deliberate Practice

Keep a journal and take notes after every major trading decision or mistake you make, especially the decisions that maximized your profit or minimized your loss – or caused you a lot of pain.

Reflect on what you are doing regularly, at least weekly, and come up with creative ideas on how to eradicate your negative trading traits from your performance. This could be as simple as leaving sticky notes on your computer screen to read every day.

The best way to start if you are slack with discipline (like I was) is to just pick the worst part of your trading and focus on that with a Kaizen approach.

For me, when I first started this process, it was risking too much. So I decided on a new rule, that I would only risk 1% of my capital per trade.

It was tough to stick to at first, but it did not take very long for good risk management to become a habit as I immediately saw the beneficial effects.

The rest slowly began to fall into place after that.

Adjust the Plan

The biggest problem I had once I began managing my risk properly was over-trading. I was so enthusiastic for trading action that I would take any setup that presented itself, no matter how mediocre.

This was a slightly harder problem to fix and a problem I still struggle with at times, especially on Mondays when I am pumped to trade again after the weekend. The key to this problem was to simply develop stricter rules around what a valid setup is so that I had less sub-par trading opportunities to choose from.

Any time I encountered a situation where I was unsure if I should take the trade or not for whatever reason, I would tweak my trading plan’s rules to reflect a solution to this problem and re-test the strategy until I found a set of rules that produced an edge while reducing the ambiguity in my setups.

If you don’t trust the plan then it’s impossible to trade it consistently. So if you notice that there is something in your plan that is resulting in outcomes you want to avoid, then adjusting the trading plan rather than employing “gut instinct” or bending the rules is always a better option.

You want to be in a position where you know exactly what you should be doing at all times. Then, not only do you reduce trading anxiety, but you also make it much easier for yourself to collect the detailed statistics which will be required to improve your edge over time.

Obviously this is a limited process as you cannot reduce all uncertainty in trading, and sometimes circumstances will surprise you. But your goal is not to reduce uncertainty in the market, but rather to reduce the uncertainty in your own mind when presented with a trading opportunity or decision.

Conclusion

The end goal is to be in a place where you can take a trade and not care if it wins or loses, but only that you followed your rules. Once you are in this place, making profits becomes almost effortless (so long as you have good rules that produce an edge, of course).

A consistently profitable trader does not judge the quality of a trade by whether it won or lost, but by how closely their management of it matched their trading plan. Once you get to that place as a trader, making money is merely a side-effect of your doing the right thing every day.

When you feel good because you followed your plan well, despite being in a drawdown or having a losing day, then you are in exactly the right position to become a consistently profitable trader.

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