Friday, March 2, 2012


Discipline is the bridge between goals and accomplishment.   Jim Rohn

A lot of people who don't trade have terrible stereotypes of what a trader does.  There used to be commercials on TV back around 2000 which showed some weird punk scalping for eighths of a point (in the old days, that's how people traded.  Really.  No, really, they did!), moaning about being "defeated" when the tide turned against him, while a sober-minded fellow in a suit stood behind him and grimaced.  That's pretty much the stereotype.  (Parenthetical note: that was the golden age of commercials featuring punks, with the "Get a Dell, dude" guy and countless others).

Anyone who actually trades for a living will tell you that the stereotype may be humorous, but it sure isn't accurate.  Traders, successful ones at least, by and large have one thing in common, and it isn't being an out-of-control punk.  Want to know what it is?


It's that simple.  Discipline.  You don't need a crystal ball to trade (though, if you have one handy...).  You don't need a degree in Economics (though, I have that).  You don't need to be Albert Einstein, and you needn't be the junkiest of junkyard dogs with no regard whatsoever for others (though some traders act as if that somehow helps them).  No, you don't need to start off with a million dollars, unless you want to really experience the pain of losing big time.

You need discipline.

Discipline is the be all and end all of trading.  Forcing yourself to take a loss when that is the prudent thing to do, selling a gain even though a large part of you thinks it could go higher, not buying more when your stock drops, those are all aspects of discipline.

If you don't have discipline, you have nothing.

It is a special kind of discipline, too.  It is not the sort of discipline that a drill sergeant imposes, or that will enable you to run a marathon.  It is a combination of emotional and intellectual discipline that must flow from within.

I liken it to writing.  A good writer must reach within to produce results.  All the handbooks, all the classes, will not make you a good writer.  It takes experience meshed with talent intertwined with that thing I was talking about.


You can have the greatest list of writing rules at your side, your Strunk on Style sitting at your fingertips, and it will not improve your writing one iota.  It takes years of hard work, honing your craft, to make the sentences flow and create a plot that people will want to read.

Or, let's put it in baseball terms.  I think every question in  life can be answered by looking at baseball.  Why do you think they have the minor leagues?  Those fellows coming out of college or high school can throw as fast as they ever will, hit as hard as anyone, run the bases like lightning.  So why don't they go straight to the majors?

Because they need to develop their craft.  They need time, experience, exposure to the same type of play a hundred times over.  Over time, they will develop the mental discipline they need to survive against the guys who are the very best.  If experience weren't the magic ingredient, there wouldn't be a single guy over 30 in the big leagues, because the twenty-year-olds have all the physical tools required.

It is like preparing a piece of wood to be a table.  You can take broad hacks at it, but that won't make it smooth and useable.  What you need is that constant sanding, over and over over, until all the rough edges are gone and it is ready for use.

With trading, I could throw all the rules in the world at you, and it won't help you at all.  You would reply, "Well, it is all numbers, and with stops and mathematical calculation, I can figure my odds and beat the market."

No you can't.  It isn't that simple.  The market requires that something extra that you cannot just tame through raw intelligence.  I don't care if you have degrees from Harvard, Stanford, and Oxford, in the most difficult disciplines imaginable - that will not translate to trading success.  In fact, the kind of pride that engenders is your top enemy, the one that will sweep you to your trading grave.

You must start out humble.  And not just act humble, you must BE humble.  Able to absorb these experiences like you never saw a chart before, never heard of a stock symbol before, never made a trade in your life.

In fact, I think that is the biggest downfall of losing traders.  They come in, big successes at whatever got them their trading capital, or just with that confident swagger in knowing they were the ones taking the other kids' lunch money.  They also probably have a little experience investing on the side, and look at this as child's play.  "I just have to enter buy and sell orders and watch my positions.  How difficult is that?"

They take big positions because, well, they KNOW that this stock they researched is the best one, or that option just has to double by the end of the month.  Because they analyzed it, and that is what must happen.  It is an exciting play like no other in the history of exciting plays, and that guy on TV just confirmed that I am right.

They might even be right the first few times.  And that is the absolute worst thing that could ever happen to them.  Because their lack of experience can and will catch up with them.

Eventually, traders who can become good realize it is a lot more difficult than they thought, and that they don't know the first thing about how the markets really operate.  Hubris will cream you in the markets, humbleness may enable you to survive.

What will save you is discipline.  Discipline, the true, palpable discipline that separates a mediocre losing trader from a brilliant winning trader, takes years to develop.  There is a very, very steep learning curve.  The road is littered with land mines.  A new trader will have some success and stop learning, stop experiencing, and then the market will shift gears and he or she will get smeared all over the road.  Anyone who has sat through a flash crash or something similar will tell you how quickly the trading environment can shift.  Until you sit there, hour after hour, watching the tape and the gyrations turning into decipherable patterns, you have not developed the proper discipline.

The discipline you require is one that tells you, "Today is not a good day to trade.  I'll just watch."  Or, "I just made a bad trade.  I am going to get up and walk away for a while."  Or, "I am down on this trade, and if it hits my stop, I'm out."  Or, "That stock is in a perfect set-up.  I will commit a quarter of my funds to it, not all."  Or, "The market has done nothing but go up for the past two months, but it still could turn at any minute.  So, I will do what I always do, keep the same position sizes, and play it day by day, because I won't be tempted into exposing myself to possible ruin."

Discipline really is a code-word for discretion.  You need the discretion that comes from nowhere else but sitting there and watching countless patterns develop in front of you.  That will help you in some future situation, you know not when, and save your account or make you a big profit instead of a big loss.

Think about your experience, and think about how many hours you have sat in front of a monitor doing nothing but watching the five-minute charts in conjunction with the time and sales (the "tape").  Unless you have more of that than you can remember, you should be watching and paper trading, not trading with real money.   And that, yes, requires discipline.

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