Counting the REAL cost of poor discipline in trading

Before we start, this is one of those “tell-it-how-it-is” articles, so perhaps turn your sensitivity meter down a little and read this in the nurturing, supportive spirit in which it was written. It does involve some work for those who are serious about growing as a trader, so be warned it lays down a challenge to act.

The bottom line is that you may have done the ‘technical’ learning, have the optimum trading plan on the planet, but many traders do NOT get the results that may be possible due to their level of trading discipline.

If one has planned an effective exit strategy, and position sizes appropriately, accepting that some trades will go against you, rarely do the major account draw-downs happen that many, many traders sustain unless you stray from your system.

More commonly, and arguably almost invariably, major draw-downs are a result of ineffective systems (and if you have not got a trading plan in place, get one!) or poor discipline in execution.

The reality is that one bad trade where discipline is noticeably absent can remove weeks or even months of positive results.

But there is another “trading beast” at play here, even if one doesn’t have the major draw-down in one or two trades, there is the insidious impact of regular “smaller” discipline issues that can nibble away at your account value over a period of time.

It is the latter that is the focus of this article.

Why this “counting the cost” approach?

The educational aim for this article, is to stimulate some evidence gathering that may indicate that something NEEDS to change in your trading.

If we look to the academic work if what motivates changes,  there is a principle of interest that could be relevant.

Firstly, if we look to Motivational Hedonistic theory, this suggests that people (and that includes traders) are motivated to change by either pleasure (in this context positive trading results) or avoiding pain (or negative trading results).

The reality is, as stated previously, that many traders have this insidious reduction of account value, or as an alternative “bumble along” finding themselves in a small gain following by small loss cycle and never seem to move forward.

This ‘middle ground’ neither causing the two extremes of trading pleasure or pain, may result in a complacency and fail to provide the motivation to take real and meaningful action to change results.

In this case, a logical approach would be to do some work that produces the evidence and jolts the trader out of this minimal action state.

This is what the following exercise aims to do or in other words,  we are going to try to create some pleasure or pain to be your motivator to take any action you need to. The idea is,  if we can mirror those trades that followed what we planned to do (and take pleasure from that), and removed the execution errors (and so the pain created by that evidence),  then we have the platform to change positively.

3 steps to create the trading motivation to change

What you need before you start

1. Ring-fence some time (after all your trading future could depend on it!)
2. A critical mass of your latest trades to review (we suggest a minimum of twenty)
3. Your trading platform to historically look at charts and the honesty to record “what happened”.
4. Your bottom-line result on our account as a benchmark of what really happened.

Step 1 – Dividing your trades.

Objectively look at the trades you have taken. Make two columns, dividing these into those which you adhered to plan (“1”) and those which you did not (“2”).  Remember, exits and position sizing are the key things to include, not only those when you let a loss run but also those where you cut a potential profit short in a trade in your “2” column ( not including pre-planned profit targets). Remember also to take a loss that did adhere to plan goes in column 1.

Step 2 – Analysis stage 1 – The trading pain/pleasure overview

Let’s start with some simple analysis.

Total the results from each column and make a judgement of what these totals mean on where your account could have been, your execution discipline and the level of pain or pleasure you feel when you look at each column.

Step 3 – “Turning the screw” – Analysis stage 2

At a deeper level we can start to look at what would have happened in those trades in column 2, ONLY if you had executed as you should.

Look back at those charts specifically and dependent on what you failed to execute, record what would have happened if you had positioned sizes appropriately, had a system stop in place (or not moved your original stop when you shouldn’t have), and if you hadn’t pressed the exit button too early when you should have adhered to your trail stop strategy fully.

In recording the difference of potential versus the reality, there may be the level of pain to create that “MUST DO” feeling to take appropriate and meaningful action going forward.

To summarise, often we need to “ram home” what is happening in our trading to take the action to grow as a trader and increase the likelihood of improving results.

Doing the suggested practical exercise may give you the impetus to not only stick to plan, but also consequently gain the opportunity to start objectively looking at how to improve that plan to better fit you as an individual trader.

And finally

One final thought, many traders come into trading with the desire to do this for a lifetime. The risk therefore of NOT addressing this, is that you not only lose a large proportion of the original capital you put into the market, but ultimately for many traders, but because there has been inaction in putting right things you need to, their pain may lead them to remove themselves from the market and destroy the potential that a lifetime of trading could create.

Mike Smith

CEO Trader IQ