Unfortunately, it’s commonplace for traders to regularly lose money by trading in a manner which they know they shouldn’t be. When markets change their type of activity and start moving quickly for example, traders who are slow to adapt to these shifts can get caught out and in the frustration of the moment, start to trade erratically.
Unfortunately, it’s commonplace for traders to regularly lose money by trading in a manner which they know they shouldn’t be. When markets change their type of activity and start moving quickly for example, traders who are slow to adapt to these shifts can get caught out and in the frustration of the moment, start to trade erratically. This is just one possible example of where a trader might feel they need to exert more trading discipline.
Part of the problem is that so many people do not know precisely what their setups look like. How many times do you hear traders talking about how they’ll take a trade when they “like the look” of the market? In fact, the problem is pretty much endemic in the business and in particular, the retail world. People just don’t have a clear enough plan.
If your trade plan is ambiguous or even non-existent, you might be able to get away with it for a little while, but when things start to change and the markets heat up, it’s really a mammoth task to maintain a clear idea of how you’re trying to trade.
Traders can tend to, if they’re not careful, focus their attentions inside the box too much. Don’t get me wrong though. Focusing solely on the time window that you trade and being in the moment when you’re trading can be a powerful tactic – I used to trade with a guy who blocked off his day entirely into 30 minute periods in order to maintain his focus.
But the trouble is that you can become a little too blinkered to what’s going on in the bigger picture. The issue with this is that it’s this picture in particular that will have a big impact upon the markets when they’re switching gears. Big players act on higher timeframes, so it’s more important than usual to keep a good awareness of what’s happening outside your own timeframe.
The Chimp Brain
Discipline/willpower IS a finite resource in my opinion and from my own personal experience. What happens is that as you have to make more decisions and your energy levels drop, you become more susceptible to decision fatigue. If lots of things are happening in the markets and your trade plan is a tad ambiguous anyway, there are two big problems as decision fatigue sets in.
The first is that you’re less able to make sense of what is going on in a timely manner and obviously as volatility picks up, acting swiftly can be critical at times. The second is that due to the ambiguous nature of your trade plan in the first place and the fact that you’ve probably had some losers that session and at the very least, some close shaves, your Chimp brain starts to erode the control that your Human brain has.
The Chimp brain is a powerful one which sees threats everywhere and is primal in its drivers. It’ll chastise you for taking stupid trades and get angry with the market for not behaving. When left unchecked, some Chimps can ruin months of superb trading in a matter of days, hours or even minutes under the wrong circumstances. So a recognition of when and where your Chimp brain takes over can be incredibly helpful to plan for the possibility of this happening. A lack of belief in your trade plan by your Human brain and the presence of potential threat in the form of uncertainty and volatility, can have your own personal Chimp jumping up and down urging you to act. Not good.
More Trading Discipline?
So do you really need more trading discipline to follow your plan? Well I can’t say for sure as each person is different, but certainly for most people this isn’t the right place to start. The right place to start is to assess your trade plan for clarity. Then you need to on a daily basis, plan for and pay attention to what the bigger picture context of the market auction is in order to make sure you’re aware of any changes in the market.
These factors won’t eradicate the chances that you’ll lose your discipline but they will help a great deal. What can be really beneficial in sensing the balance of power within your own mind is practicing mindfulness as you trade. If you’re anything like me, the issue is that when there’s more action you’ll naturally want to sit at your desk for longer. Unfortunately, this is only likely to make you more susceptible to mental fatigue and therefore decision fatigue. In turn, your Chimp might show up and that’s clearly something to avoid if at all possible. Mindfulness can help you to maintain self-awareness and get you to take more breaks than you normally would so you have the chance to recharge.
So before you start thinking you’ve just got terrible trading discipline, be sure to take a proper look at the circumstances under which you find you’re losing it first.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.