Tuesday, June 27, 2006

Top Ten Reasons Traders Lose Their Discipline

Losing discipline is not a trading problem; it is the common result of a number of trading-related problems. Here are the most common sources of loss of discipline, culled from my work with traders:

10) Environmental distractions and boredom cause a lack of focus;

9) Fatigue and mental overload create a loss of concentration;

8) Overconfidence follows a string of successes;

7) Unwillingness to accept losses, leading to alterations of trade plans after the trade has gone into the red;

6) Loss of confidence in one's trading plan/strategy because it has not been adequately tested and battle-tested;

5) Personality traits that lead to impulsivity and low frustration tolerance in stressful situations;

4) Situational performance pressures, such as trading slumps and increased personal expenses, that change how traders trade (putting P/L ahead of making good trades);

3) Trading positions that are excessive for the account size, created exaggerated P/L swings and emotional reactions;

2) Not having a clearly defined trading plan/strategy in the first place;

1) Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality.


Ron Sen, MD said...

Great list. I might add another (under planning)...inadequate preparation/study.

Brett Steenbarger, Ph.D. said...

Great point, Ron. That ratio of the time spent in preparation vs. actually trading is so key...


Sienna said...

I think one's ability to harness their perception and refine it within their own strategy is a key element too. By nature, we all perceive things differently. We all know what up and down looks like, but it is the areas in between that can be perceived dramatically different depending on who you talk to. This can be a problem when someone is depending on recommendations made by others because they simply will not be able to perceive the chart the exact same way and/or understand all the variables behind the recommendation. This leaves them open to the vulnerable position of not being able to effectively make decisions at a moment's notice, which may lead to panic and irrational decisions.

Basically, people need to understand the way they perceive and how they can use their own natural abilities to their advantage instead of depending on others to craft it for them.

Brett Steenbarger, Ph.D. said...

That's very well stated. The research that I have reviewed re: the development of expertise points to the perceptual advantages of the expert as a function of the information processing abilities they gain with practice. This occurs in fields as diverse as chess and tennis. Thanks for the note--


stockhustler said...

Having traded for 15 years I can point to three mistakes I would make and get so down on myself because I knew better:

1. After losing money on a trade, I would take bigger risks out of desperation to get back to my break even point.

2. Putting on a much bigger position into the close in hopes to sell the position in the after market or premarket premarket just to make a .50 or so. Risky business b/c if you cant sell it you cant sleep. You pray the market opens in your favor.

3. Playing earnings. I would tell myself after making the wrong call that I would never do it again, no matter what. Then after doing well for a while, Id get confident and think I could afford to take the rish again. By the way, you only feel like you can take the risk because your up. Once you make the wrong call, you realize fast that you couldnt afford the risk.

These three things could have ended my career at any point. Thankfully, I do not participate in them anymore. They are all rookie mistakes and just plain gambling.

Losing money makes traders lose their discipline.

Stay Focused

cast said...

I find that most of my own distraction or focus-loss is due to anything not involved with trading..... Am I alone on this?

Brett Steenbarger, Ph.D. said...

Hi Cast,

No, I think that's common. About a third of the traders I meet with end up discussing personal matters apart from trading that nonetheless affect their trading--


Project Night Sky said...

I currently face # 6. Yet how do you battle test a trading style that is not mechanical? (i.e. discretionary?)

Brett Steenbarger, Ph.D. said...

Hi Project Night Sky,

You can battle test discretionary trading by treating it like a trading system and gathering extensive metrics on the proportion of winning/losing trades; drawdowns; average size of winners/losers; etc.


Brian said...

My biggest mistake it after a loss my focus moves to recovery and not on my plan or whether the setup is valid and confirmed. I have worked hard to not make that mistake anymore, but if I do I usually catch myself and exit my trade with a small profit or loss. I have also found that if my loss is the result of a trade outside my plan then I feel guilty and have more pressure to recover the loss, but if the loss is just a part of trading (you cant will them all)and I followed my plan I dont have the same feeling of guilt. Trading my setups as planned is my solution to success.

Thinker said...

In your response to Project Night Sky you talk about gathering performance metrics. I have been back testing a couple of systems for a while now, and I can't seem to make up my mind on whether or not the systems are ready for primetime. The systems underperform a purely buy (sell) and hold approach - assuming that one either went long or short at the start of a year. What metrics should one use to evaluate a system? Is it reasonable to expect that a system should beat buy and hold on a non-leveraged basis? Appreciate your thoughts on this.