Monday, March 08, 2010

When Is Breaking Discipline Good Trading Practice?

My recent post took an initial look at the real-world challenges of planning and executing trades. That post was sparked by my ongoing observation that few highly successful traders actually trade in the manner that we read about in trading articles and books. They are good at following rules, but they have an uncanny sense for when to bend the rules.

While the idea of planning your trade and trading your plan sounds wonderful as an ideal of discipline, what I find among successful traders is an ability to alter plans in real time as market conditions dictate. These traders are neither highly emotional and reactive in decision making nor robotic in implementing a set of rules. They are more like the expert quarterback who follows a game plan, but doesn't hesitate to call an audible and exploit a weakness in the defense.

The challenge for trade planning occurs when implicit knowledge coming from pattern recognition flies in the face of an explicit set of plans. The plan may be to hold a trade to an anticipated target, but then you sense a shift in the balance between buyers and sellers as volume comes in against your position. Is jumping out of the trade good judgment and trading, or is it a violation of discipline?

My own experience is that I have lost good amounts of money when I've stuck with discipline over trusting my gut.

Or might it be the case that accessing and following implicit knowledge *is* an elite form of discipline? If so, many good traders are very disciplined in how they break their discipline.