Friday, August 21, 2009

Why Can't I Follow My Trading System?

Perhaps the most common concern I hear from traders is that of "discipline": following one's trading plans, rules, signals, and/or system. Sometimes the lapses from discipline involve failing to take trades that are indicated. Other times, the problem is one of overtrading: taking trades that lie outside one's rules.

If we think of lapses of discipline in other areas--cheating on a diet, for example, or procrastinating on work that needs to be completed--we can see that, many times, we act against our longer-term self-interest by becoming caught up in shorter-term needs. If, for example, we cannot tolerate boredom, we might eat to fill the void and break our diet.

Ignoring those short-term needs, as a whole, doesn't work. Unmet, they eventually sabotage those longer-term intentions. We can tell ourselves that we'll do nothing but work all day, but other needs will inevitably creep in. Even if we don't act on them directly, we'll play them out in daydreams and escape work that way.

When discipline works, it's often because people have found constructive ways to meet those short-term needs. The smoker who craves a cigarette may chew gum as a substitute oral activity. I enjoy sipping on a hot drink while I'm working, but too much coffee can get me wired and that gets in the way of the work. Now, as I'm writing this, I'm sipping my herbal tea.

The key to sustaining discipline is to identify the specific short-term needs that are occasionally overshadowing trading rules. Once you've made that identification, it is easier to then brainstorm constructive ways of addressing those needs. Traders who overtrade, for example, often have problems during quiet market times. Their needs are for stimulation. By creating stimulating activities during the trading day that don't take them away from their screens, they can avoid using unwanted market activity as their stimulation.

This is one reason that teamwork and training at trading firms can be so valuable: they provide a constructive focus for traders apart from trading, especially during slow times. At one prop shop, Trading RM in Chicago, traders actively call out their "special trades" and make teamwork and interaction a routine part of the trading day. It's a little more difficult to avoid good trades and put on bad ones if you're sharing your actions with your colleagues!

Other times, traders fail to follow their rules because they don't truly have confidence in their ideas. They front-run their own signals out of anxiety and wait for perfection in setups before they act. Their short-term needs often are for safety and security: they need to believe in what they're doing. Very often this problem occurs when traders have short-circuited their learning curves. They are putting meaningful capital at risk before they've done the paper trading and small real-time trading needed to build a successful track record. You believe in your system when you see, in your own experience, that it works over time, across market conditions.

In general, I've found the cognitive and behavioral methods outlined in the Daily Trading Coach to be particularly helpful for discipline issues. For more on the topic, check out these readings:

* Rules and Discipline

* Turning Plans Into Commitments

* Trading Discipline Linkfest


OKL said...

There's a positive from this insane market that I began trading since early 2008; i've lost quite a bit of moolah, but still going on.

What's the positive?

From Super Bull in 2007, Mild Bull in early 2008, Shock in Mar 2008, Steady Decline in Mid 2008, Panic in Fall 2008, Insanity in Late 2008, "we're f**cked in early 2009", "what next in mid 2009" and it now it seems like "we're okay".

Lots of different market conditions and I KNOW if I can make it through this with purposeful intent and effort, my learning curve and experience will be much faster.

Of course, that depends on how long the account lasts @_@; sad to say after almost 20mths of observation + paper trading + real trading, i still can't get my mojo.

As for discipline with trading systems, its hard to be disciplined i find, when market conditions are changing every 3mths; but that's no excuse and i'm still adapting and learning to the various market conditions.

That might sound ill-disciplined, but i guess its a fine line between discipline and adapting- knowing when to break the rules; but you can't if you don't know when it works!

**Additional observation; last fall when oil prices began plummeting, it was in the 75-85 range that its relationship with equities began changing; from a inverse one to a direct one; "Omg even oil is falling... the whole world is f*cked! SELL! SELL! SELL!"

Yesterday was the one of a few days i observed at these highs that stocks went up, but oil was down.

Interesting huh... and given how the govt is "all in"; i do wonder if the "evil speculators" are going to gain more publicity.

Herbal Tea huh? You should drop by China and get some good tea.

Cheers again Doc!

OKL said...

Is it just be being stupidly blind or is the treasury market not responding proportionately to the USD weakness?

Jay said...

Hi Dr. Brett, I have so much to say about this subject that I could write pages, actually, my journal is full of this subject and me.

It's been a journey of self discovery and many many revelations, and a few epiphanies. And my losses have slimmed down and I've experienced a few positive weeks.

Also been studying your Psychology of Trading three times, so far, and it's well worn.

There is a trend where I study your P.O.T. book, then it sinks in subconsciously, then during trading, I have my own observation or cause in my psychology and come up with a solution that works; it feels like something I discovered, however, it is from your book! Funny, but effective. ...i could go on.

So in regards to this specific blog post, I have discovered the snowballing effect of a trigger I initiate frequently that causes me to trade, NOW. There was never, ever any turning back once this process ignited in me. The interesting thing, as with many of these observations of mine, is that once I recognize them, they weaken considerably. This huge one I just described happened only a few days ago and hasn't returned and I'm pretty sure I have it beat. Thanks for all your efforts to help us! - John