Sunday, April 03, 2016

Building Your Trading Willpower

Consider the following scenarios:

*  We decide to enter a position at a particular price level, it hits that level, and we create an excuse and fail to take advantage of an opportunity;

*  We set a stop loss on a position, but rationalize staying in the position when that level is hit, creating a loss that wipes out many days of gains;

*  We establish a process for researching markets and keeping ourselves in peak condition, but become distracted by life events and fail to follow our process;

*  We take an unplanned trade after losing money and widen our losses.

In each of these cases, we have what traders commonly call a loss of discipline.  In fact, it is a failure of willpower:  an inability to sustain intention.

Our focused attention--our intentionality--is a finite resource.  It becomes fatigued with use.  When we frame trading problems as one of lack of discipline, we treat our challenges as character flaws.  When we frame trading problems as one of lack of willpower, we open the door to strategies that preserve the willpower we possess and expand our level of willpower over time.

We are like houses with leaky windows:  we lose energy no matter how much we turn up the heat.  In such a house, you would close windows and seal the areas around them.  You would minimize leaks.  Think of all the willpower leaks in your trading house:  the lost energy staring at screens and fretting over price action you can't control (and that is noise relative to your trading horizon); the poor eating and sleeping patterns; the emotional drains of negative self-talk.  With diminished willpower, we are much more prone to distraction, much more likely to betray our best planning.

If willpower is indeed like a muscle, then the most promising strategy for trading performance is systematically exercising and strengthening that muscle.  As in the gym when we build strength, this means sustaining effort just beyond the level of our comfort zones.  This can be any effort, whether it's spending quality time with children, cleaning the house, reviewing charts, or preparing a meal.  What we do with extra effort builds our capacity to sustain effort: that extra dollop of willpower becomes our new equilibrium point.

When we cut corners and avoid effort, we erode willpower.  Like any muscle, it atrophies with disuse.  The wrong lifestyle makes us progressively less fit to trade successfully.  How we live our lives outside of trading is the best training for proper trading psychology.

Further Reading:  Why Disciplined Traders Make Bad Decisions