“The key to trading success is emotional discipline” – Victor Sperandeo
95% or so of people who try their hand at stock trading or speculation in stocks lose money consistently, or splash a lot of water around only to realize they really got nowhere – at best matching performance of market averages.
The reason they can’t become reliably profitable, and meaningfully so, is the same reason that the vast majority of people really never achieve to become ‘grown ups’ – a lack of discipline.
That word tends to leave a bad aftertaste with many people, summoning up images of a drill sergeant punishing young cadets for not shaving adequately, or parents scolding their children to clean up the mess of toys lying around.
Here, I want to discuss a few examples of where lack of discipline can cause problems in the stock market, and a few ways to go about improving our ability to be and stay disciplined. I’ll be talking about the market here, but the ideas mentioned really refer to any endeavor in life.
Genuine discipline is self-discipline
The problems with those images are that discipline is portrayed as 1) something external that is done to us to regulate our behavior, and 2) a violent scolding or punishment for mistakes made. The former only serves to breed dependency, the latter encourages window-dressing, conditional character, hiding, dishonesty, and negative sentiment.
True discipline however is a change in behavior due to an understanding of the long-term positivity of that change, and does not come from the outside – it comes from the inside.
Genuine discipline is internal, which means that we are able to regulate our behavior by ourselves, without enforcement by external forces. Relying on ourselves to enforce the unpleasant or uncomfortable is much harder than outsourcing this obligation – hence the great popularity of personal trainers, dietitians, business consultants, and so on. Taking a daily ice bath is hard enough when someone else pushes you in, but it’s even more difficult when you’re the one that has to make you jump.
With respect to operating in the stock market for speculative gain (and yes, that includes any type of stock speculator, from a trader to a long-term “investor”), there are two crucial facets to discipline. As in real life, to call ourselves mature and successful, we need to be able to:
- Make ourselves do the things that we don’t want to do but should, and
- Make ourselves not do the things that we want to do but shouldn’t.
Not doing things we want to do
In the stock market, ‘what you want to do but shouldn’t do’ encompasses a huge number of imaginable scenarios, and examples could fill a large book cover to cover.
The details again heavily depend on your strategy. But a useful guidepost is the question:
“If you did this a thousand times, would it cause you a net loss or profit”?
Generic examples for many strategies could be:
- Buying into stocks that have extended far beyond low-risk entry points, where the odds of volatility shaking you out (from using stop losses) became intolerably high
- Entering low reward/risk ratio trades
- Buying into late, mature markets close to their top, where most capital is already “in” the market and not much firepower left to drive it higher
- Averaging down
- Hoping for a small loss when you should fear a big one (risk management), and fearing to lose a small paper profit when you should hope for a large real one to develop later (selling too early instead of sitting in an established trend)
- Acting when the odds are against a strategy making money
Things we don’t want to do but should
This is the opposite of the above – making yourself do something (seemingly) uncomfortable or tedious. There are a couple of classical examples of rookie mistakes here, but also a few that intermediate speculators succumb to:
- Acting contrary to consensus opinion (news, magazines, online boards, friends & family)
- Buying when sentiment is negative, news are bleak & fear is high
- Taking a small loss when you have it, instead of hoping for the stock to reverse back in your direction, and inevitably snowballing a small loss into a big one
- Performing routine journaling of the market & logging of orders
- Adjusting risk exposure along the market cycle and recent success
- Being extraordinarily patient
- Looking at all the data, not only the one that supports our thesis
These are but a few of the hundreds or thousands of things one can get wrong when speculating in the markets. Though, looking for a solution is always a better use of time than pondering on the problem itself.
How can we make ourselves more disciplined?
Improving your discipline #1
To improve your discipline, there is essentially only one way: Do more of it. There is no magic bullet – that’s why it’s such a coveted trait.
But there is a trick in which you can get started: Get started in whatever way, but get started small … then keep doing so, and the big things will follow by themselves.
When it comes to consistency in discipline, it is helpful to use the following perspective. We are essentially constantly evaluating ourselves with something akin of a “social credit system”. We look on ourselves as if we were somebody else, somebody we don’t know whether they’re trustworthy and reliable, or worse, somebody we know not to be so. We can try to hide from ourselves the fact that we are not disciplined by making up excuses why we’re not, but in the end, somewhere deep down, we know that we are not disciplined, or can be trusted to act in such a manner. To yourself, you can run but you can’t hide. Lack of discipline leads to less evidence of being able to be disciplined, and less self-trust for the ability to show discipline in the future. This leads to frustration, defeatism, and more lack of discipline – a downward spiral.
The antidote is to break that spiral, and that is done by starting small. For example, if you are overwhelmed by the daily temptations of a hostile market environment in which you really shouldn’t trade, just start with abstaining from one single setup/pattern/opportunity, and see how it goes. It’s less about whether that trade will work out or not, but about giving yourself evidence that you can be trusted to abstain, to be disciplined.
Once you have done this once, try another time. And another. Then try something a bit more bigger – try not to place an order for a week, or a month. The more and more you manage, the more evidence of your own ability to stay disciplined you have to reckon with. You start building “reputation” to yourself of being able to be disciplined when you really want to. You are building a new relationship with yourself, with that new reputable personality who can be relied upon, who can be trusted to be disciplined when temptations arise – who can keep the discipline up also during a storm, and not only when the sun is shining.
By starting small, you are giving yourself credible evidence that you can be reliable … initially it may be small, but there it is. On this evidence you see that it’s possible, and that you can do it again. In this way, you can slowly build more and more incidences at which you can look and not only hope that you might deliver, but know that you can. This quickly becomes a virtuous spiral, in which good action begets more of the same.
Improving your discipline #2
Further, you need to realize that discipline is not all-or-nothing, black-or-white. Discipline comes in degrees of more or less . It’s a skill that can be built and trained, and is not something you either have or you don’t.
Rome wasn’t built in a day, and a good lot of buildings and bridges sure collapsed the first time they raised them – but in the end, Rome was still built. And the Roman empire did not come down in a day of neglect – it took centuries for it to decline. Now, replace the word “Rome” with “Discipline”. A disciplined character is not forged in a day or week, and it is hard at times to press forward – but the more you advance, the easier the pace can be maintained.
Many people will try to improve something in their stock speculation (or life), and be successful for a little. But sooner or later they will inevitably have a bad day and trip back into the old behavior, perhaps multiple times. This is a testing point where many people become frustrated and give up, believing they can never attain higher levels of discipline.
Here it is important to remember that it’s not about getting to 100% on the first try. The human condition is predicated on making mistakes – expect such road bumps, and once you make them, think about why they happened and learn from them so they will happen less often in the future. Discipline is a skill that gets better when continuously applied, and failing here and there to be disciplined is completely fine as long as you muster the energy to continue going. To keep building Rome after that townhall has collapsed.
Don’t indulge in perfectionism, rather in progressionism – every day that you move in the right direction is a good day.
Success is about applying yourself when it matters, and learning from mistakes when they appear. When you start overtrading again, after a period of abstaining from a bad market, be kind to yourself and find the true reasons why your discipline faded. When you start easing your risk management system or ignoring profit-taking rules, find out where this need to deviate comes from. There is always a psychological reason – hope, fear, greed, hubris, panic, anger, FOMO, indifference, defeatism. Don’t let it get to you – just take a step back, understand why it appeared, find a way to work with it better next time, and move on.
Why are your rules there in the first place?
A technical approach to the right mindset can equally help. Every time you try to be disciplined, it means you want to stick by some set of rules that command action, or inaction, in a given scenario. If you feel yourself wavering, stumbling off the path, remind yourself of the ‘why’ behind these rules.
Why did you instate them? Is this a lesson you (or others) have learned from previous losses, and have similar situations in the past led to losses? Do the rules reflect bad odds of certain (in-)action, and would such (in-)action lead to losses or other problems when done over a longer time-frame?
Find the reason the rules exist, else they’re only ‘red tape’ that your inner adolescent wants to rip off to see whether he can get away with it.
I hope these ideas might help you to improve your own trading or speculation in stocks. For getting even deeper into the matter of trading psychology and keeping up discipline, feel free to sign up to my stock speculation bundle!
