Paul tweets regularly about the need to be patient for good setups. When you’re patient, trading becomes easy. It doesn’t mean you always win, but it’s easy. Good trades move quickly in your favor, giving you plenty of room to take profit, hedge, and sit through pullbacks. Bad trades break quickly, hand you a small loss, and let you re-allocate your capital to the next opportunity.
It flows.
But most of the time, our trading doesn’t flow. The markets are always moving. People around you are making money (at least they’re claiming on Twitter that they are). So we chase. We trade breakouts with no clear stop loss, by taking trades that aren’t our style, or by trading securities we aren’t comfortable with.
We all know we should do this. So why do we do it? Most people will respond with something like, “greed!” or “stupidity!” or “lack of discipline!” I think those topics miss the boat. Most traders I know aren’t greedy–naive maybe, but not greedy. They certainly aren’t stupid. And while they may lack discipline, telling them to “be more disciplined” isn’t really helpful.
The things that have helped me the most are part procedural and part emotional.
We must be meticulous and focused in our preparation. We can’t be disciplined if we don’t have something to be disciplined to. This extends from the big picture (defining what kind of trader you are) to the little picture (planning your trades for the day). This preparation allows you to go beyond recognizing good setups when they happen and to instead anticipate those setups before they happen. It puts you in control.
That’s a start. Now you have a plan to be disciplined to. But it’s not enough. Every trader has heard “Plan your trade, trade your plan.” But we still fail to do it. Why? Emotion.
This is point when most traders will tell you that you need to remove emotion from your trading. I think this is nonsense. Of course, you can’t be an emotional basket case when you trade. There are some emotions you do need to control. But I don’t think most traders lose because they fail to eliminate emotions. I think they lose because they to engage their emotions.
Modern performance psychology has pretty well established that emotion is part of human decision-making. In fact, it turns out that we literally cannot make decisions without emotion! We humans know lots of stuff, but we don’t act based on what we know; we act based on what we believe.
Traders don’t chase bad trades because they don’t know better. And most traders don’t chase bad trades because they’re greedy, or stupid, or overly emotional, either. They chase bad trades because, at an emotional level, they don’t believe in their strategy, their process, their rules.
I learned all the basic rules for success fairly early in my trading. And I created a halfway decent trading plan that followed those rules. But I still chased bad trades. Why? I didn’t believe that my rules and my plan were enough. I hadn’t proved it to myself. And without that belief, I got sucked into chasing everything that moved. It was only after I restricted myself to a very small account with very limited trading opportunities — and made more money than I’d made before — that I believed in the process.
Don’t get me wrong, I still mess up. But I force trades less than I did before, and my trading is easier than it was before. Not because I’ve learned more strategies but because I developed the belief necessary to be patient and wait for those easy trades.