What's stopping a trader?
When traders lose money, they often attribute it to a problem of loss of discipline. However, this lack of consistency is actually the result of many different problems, not the cause. Traders lose discipline in trading for the same reasons that people on a diet lose discipline in their eating regimen or people about to get fit lose discipline in exercising regularly. It's very simple - our whims, needs and mental state in the moment tend to disrupt our longer term intentions. We pursue short-term pleasures (and avoid short-term discomfort) at the expense of long-term rewards.
Here are some common reasons why traders (and most other people) have failed to accomplish what they fully intended:
- External distractions and boredom leading to lack of concentration - all of us have certain limitations to our attention spans, and so we tire easily during quiet periods of the market.
- Fatigue and mental overload create a loss of concentration - Having to watch a screen for hours on end prevents us from being perceptive, creating fatigue effects that are familiar to pilots, chauffeurs, and sentinels.
- The arrogance that follows a successful series, - it is quite common for traders to attribute success to skill and failure to random external factors. As a result, a series of even random winning trades can lead traders to become overconfident and violate trading plans by trading too frequently and/or with excessive volume.
- Unwillingness to accept loss - this leads traders to change their trading plans after trades entered the negative zone during market reversal, which means that short-term trades form long-term a priori losing positions.
- Loss of confidence in a trading plan/strategy because it has not been tested appropriately - It is difficult to allow even a strategy-specific slump to occur if you are not confident in your methodology. This confidence does not come from simply talking to yourself in a positive way. It takes at least testing your methods (on historical data and in real time) and observing them in your own experience to show that they really work.
- Individual characteristics that lead to impulsivity and low resilience in stressful situations - psychological research suggests that some people are more impulsive than others and less conscientious about sticking to their plans and intentions. These personality traits are often accompanied by excitement seeking and a high degree of risk tolerance, a lethal combination for successful trading.
- Situational domestic pressure - it includes the trading downturn and increased personal expenses that affect how a trader trades and cause him to put his return-to-risk ratio above making good trades. By worrying too much about how much money he is making, traders can no longer follow the markets with a clear head.
- Trading positions that are excessive for the account size - is far more common than is realized. It creates exaggerated fluctuations in return to risk and emotional reactions that are detrimental to calm, cool and planned behavior.
- Lack of a clearly defined trading plan/strategy - it is interesting that many traders do not consider themselves intuitive players, but in fact do not have a clear set of trading rules that they follow. It's hard to be consistent (and true to your consistency) if you don't have a clear plan of action in the market.
- Trading on a time period, market or trading method that does not match your talent, skills, risk tolerance and personality - too often traders turn away from their plans because they don't feel they have to follow them, or they really don't come naturally to them. These deviations from discipline are actually unconscious attempts to trade in a style that is more suited to the trader's skills and talents.
As you can see, not everyone disciplinary problems have their origins in trader's psychology. Very often, the loss of discipline reflects problems with the trade itself. Discipline in commerce is not that different from "discipline" in a romantic relationship: if you're doing things right, you won't have much desire to shirk. But if your trade doesn't suit your needs, it's very easy to violate your intentions!