The Disciplined Trader is the only trader who consistently profits… or is this a load of hooey?
Darren and Walter examine discipline in this episode, what is it? Why is it “needed?” Is it overrated?
Trading discipline is the topic for this episode (and some of this you’ve probably never heard before).
Download (Duration: 19:34 / 22.3 MB)
In this episode:
00:36 – concept of discipline
02:20 – a successful trader
04:48 – market biofeedback
06:17 – rules and discipline
07:21 – definitive rules
09:05 – difference between newbie and experienced trader
10:40 – exact revenge
13:40 – hard wild
15:58 – trading buddy
Walter: You’re missing out on a valuable piece of the equation if you simply limit yourself to a set of “if / then” rules.
Announcer: Two traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.
Walter: Welcome back to the Two Traders Podcast. Darren is on the line. We’re going to talk about discipline today. Darren, this idea of discipline as with regards to trading, what does that make you think of, when you think of this concept of discipline?
Darren: Yeah. People talk about discipline a lot. I’m not sure that I completely agree with it really. Because you usually put forward, that in regards to trading, discipline means basically you should have your plan set up and then you should follow it to the letter. I don’t really believe that’s a good way to approach trading.
I’ll explain why. Basically if you trade that way, it means that all of your actions are predetermined. There’s no any scope in there for you to add new data to your process.
A very good way of describing it. Let’s say for instance, you have a predetermined setup where to enter the market, these occur and then you have a predetermined stage two that you do next. The idea here is, if you’re disciplined, then you just follow this through, come what may. I think that’s basically saying that you can’t react to what the market does.
For me, a big part of my trading is reacting to what the market has just done. Then making a decision based on that. I think we have this concept that, you can’t do that successfully because you’re emotions are getting involved and you basically rely on your biases.
If you’re not trading well or if perhaps you’re still learning to trade, then you may well do that. One of the key things to being a successful trader is the ability to take a new day till you’ve got a market movement and not just be emotional about that. Look at that in the context of your plan and the context of what’s happening now. Then make your decision.
I think often, that discipline idea is pushed that you should be like a machine. Basically, you’ll just grind out the plan day after day after day. I don’t think that rings true. If you look at, or if you ever hear people who have algo trading and funds talking about how their algos work, they’ll often mention that they have an algo that runs to a certain plan. But they’re constantly looking at the market and then decide on how they apply that algos.
That’s my concern with the discipline. This is quite often like a mantra of just doing stage one to six and not reacting to what’s happened.
Walter: Yeah. You’ve hit it, when you talked about the algos or the automated or expert advisor trading. That’s style of trading. That’s always been my argument that when people say “the reason why I want to automate my system because I want to take “me” out of the equation, I want to make sure the system is followed to a T and all the rules, every other boxes are ticked in. I know the systems work and you just need to get out of the way like computer random”.
The argument I’ve always have, is that people don’t do that. They do exactly what you just said. Which is the overlord gets to decide when to turn the algo on and off, when to adjust it. All this sort of thing happens. You still make these trading decisions even if you say you’re an automated trader.
I’ve had a couple of people who’ve argued that with me. A few of them have eventually come back years later and say “Okay, I get it, you’re right.”
Because it’s true we do this sort of things. We put it on a box and say “Okay, this is going to work”. If we take all of the emotions out of it and make it automated and just structure something that’s bullet proof. The problem is you’re still the person who has the finger on the switch. You’re still the one who flips it on and off. That’s the biggest decision of all really. Yes, I’m with you on that one.
My question for you would be, Darren, if you’re thinking about like and I agree I believe that you know…Like this idea…I call it “market biofeedback.” Where you get this information from the market and then you can apply that to your trade. So you’re actually better off in your trade after it’s occurred because now you’ve got more information from the market.
In whatever form it is, it could be in the form of news. If you’re a fundamental trader, could be in the form of more candles on the chart. If you’re more of a price action trader like I am, you know you can kind of use that information. There’s a caveat though because now you’re in a position.
The question is, are you able to simulate that new information after you’ve pulled the trigger and enter the trade in the right way? Are you going to see everything with the bias or are you going to see it for “what it is”? or whatever that means.
That’s the tricky part. My question for you Darren, basically is, if this is true that you get lot of this information from the chart, that you can use that information to adjust or make better decisions for your current open trade: Why is it that some traders, they feel like once they’re in a trade, they’ve either got a hit it a profit target or the trailing exit has to get them out of the trade or they hit their stop loss? Why do they feel like that? Why aren’t they be more open to adjusting their trade?
Given the new information that comes through the chart or in the news or whatever.
Is it because of this reliance on the rules and discipline? They’d just say “I don’t want to make wrong decisions. I’ve got to stick with them. “I’m either gonna get popped out for a loss or I’m going to make some profit on this trade.”
Darren: I think there’s probably a few reasons why they want to have those definitive rules. I think firstly, it takes time to realize that often your decisions are being made purely on what’s happened on the chart. Once you’ve learned a technique of really rationalizing why you’re making the decision and noticing how you’re feeling.
For instance, let’s say, you enter the first trade of Monday morning. It shoots 60 pips in your direction in a single bar. You’ve got a sudden on rush of emotions and it is very easy to just instantly make your decision based on that.
I think they want to remove that uncertainty. People believe the best way to do that is to have definitive rules. It’s quite hard for people to take on the notion that actually when you practice and get better reading your reactions to events in the market.
Like, a trade race enough in your direction or like a period of losses. Actually the best exit is some sort of defined structural exit and then your reading of the context. Ultimately that cannot be beaten because the market is like a repeating pattern. There are patterns that appear to repeat and look very similar.
But, really, the best way is to be able to judge your emotions. The level of your emotions you’re getting. Is it fear? Is it greed? Use a bit of your experience when you felt those feelings before. Then you can just make a much better judgement on what action to take.
Obviously if you compare that to saying “it goes 50 pips I move my break even, to zero if it goes to a 100, I take profit”. Which ones sounds like the simplest way to trade? Which one sounds like the best week to take.
Obviously the simple one with no uncertainty sounds like the best. Long term if you want to trade really well you have to go beyond that I believe. Get much better, at accepting the uncertainty and being able to read your feelings and using it as data.
Walter: Yeah. I think you’ve hit it. That’s the difference between a new trader and an experienced trader. To simplify: the new trader is more susceptible to herd psychology, to herd behavior, to crowd psychology. Feeling of missing out. The feeling of it’s important to copy others who are successful.
As you become more experienced, what typically happens is you focus more inward. It’s like “Daniel-san, focus inward”. It’s almost like this spiritual thing. If I were to make one recommendation for people out there who were thinking “Okay. That sounds oh well and good Darren and Walter. What do I do about this? How do I focus? How do I see what’s going on. It’s difficult for you to take a step out and see yourself”.
I would say, “meditation and hypnosis is one really good way to get in touch with yourself.” Another way is to use a simple experiment. It’s like visualization of seeing yourself as you’re taking a trade. What would it’ll look like if you’re outside the window watching you take a trade and watching you manage a poor trade? What would that look like if you are poorly managing the trade? What would you see yourself do?
What you’re trying to do here is be a little bit more objective and seeing you experiencing of the emotions. Make no mistake about it. Here’s the one thing that ruins traders. It ruined me when I started trading. It was this idea that I needed to exact revenge on the market. If I lost a position while I took 3 lots, the next trade I’m gonna take 6 lots and get all that money back right?
These are the sort of things. I guess this is really where discipline comes from, isn’t it? People say “you need to be disciplined.” The reasons why you need to be disciplined is otherwise you’ll just going to burn yourself up. You’re going to lose all this money and you’re going to make all this wrong decisions.
That maybe true when you’re starting out as you say. As you get further along, you’ve got more experience interacting with the markets and your actually making money. I think you’re right, you’re missing out on a valuable piece of the equation if you simply limit yourself to a set of “if – then” rules. Is that basically what you’re saying?
Darren: Yeah. I think so. You need to be disciplined in how you make your decisions. When you’re all calm and everything is going well, then you know you make decisions very rationally. The key times when you’ve got a lot of profit or when you’ve had losses and your emotions are heightened. You need to have, some sort of process where you’re noticing that and then not making ill disciplined decisions based on that. I think it’s really hard to do.
I used to suffer myself when I’ve had losing spot, 4 or 5 losses on the trot. It’s very difficult for me to take the next trade or perhaps manage the next trade well. I’ve just kinda built a habit in my mind of almost like having a dialogue like you say “being outside myself”. I have a little sort of conversation with myself “this is what I’m feeling now. This is what I want to do. Is that the right thing to do?” Thinking back and I’m going back through the experience.
“Now, actually when I’ve done that in the past. That’s been the wrong thing to do.” Now I’ve decided on my actions and then I’ll take it. A little bit of the problem is when we start to use that approach, we seem to think we can still get rid of that uncertainty with the exit.
Still like, do everything right and it was completely the wrong time to exit. You just kind of reduce the really bad errors a small percent. That can make a long period of trading. Removing those really bad mistakes can make a big difference. I think that’s where you want to focus with discipline, that’s my opinion.
Walter: Right. Yeah. Fair enough. The danger here I suppose, from my point of view, is that somebody who is new to trading, who is listening to this, going “Yeah! I get it”. They want to run off and open it up and allow themselves to have more freedom to go hard wild.
I’m just wondering if that’s like how do you draw the line? How do you know? Okay, I should allow myself more freedom and enable myself more latitude in my trading decisions versus someone who should not. Is it just a simple as, are you making some money? Are you consistently making money? How would you know?
That’s the critical piece to me in this, is that we’re saying that, “you should take the information that you’re getting and you should incorporate that in your trading decisions instead of being so rigid”. At the same time there’s a place for that rigidity and there’s a utility especially if you’re new to trading. How do you know if you’re someone who needs a little bit more discipline versus someone who needs a little bit more of broad scope of what’s possible in terms of what you can do in your trading.
Darren: I think really, it has to come through trial and error, time and experience. I would never say to anyone “Don’t go hog wild with all of your money in your account. Don’t go hog wild on the demo and learn about yourself. Find out what really ticks for you and make your own rules about trading”.
The kind of spectrum of ideas that is put forward that we have to trade with is so narrow. If you read about successful traders, they go out there and they’re breaking rules. They’re doing stuff their own way.
Ultimately, I suppose that’s going to be the easiest way to be successful: Explore a bit. Throw away your old sets. Start from scratch. Forget everything and just find out about what feels right for you. Then build some structure around that when you’ve kind of understand more yourself as a trader.
Walter: Yeah, absolutely. I guess for me that’s the key here. That’s a good advice. To actually allow yourself to go too far and then see maybe you can rein it back in. I think it’s really valuable to have a trading buddy. That’s one of the things I’ve been trying to do with people who wants to be matched up with a trading buddy in the private form.
I’ve tried to find people of good match. This is really a good exercise. If you can find someone that you can talk to and show them what you’ve been doing. Just having that other person’s see and seeing what they have from their perspective can be useful. Some of you listening right here are probably thinking: “You know what? I’m too advanced for that. I don’t need a training buddy. I’m already doing well” or whatever.
One of the things I’ve noticed is that, when you do this exercise and you match these people up, sometimes what ends up happening is: the more experienced trader who’s going into the relationship saying “Eh! I don’t know why I’m really doing this”. The more experienced trader actually ends up learning more and getting more out of it than the newbie trader.
It’s something I think it’s worthwhile. Especially given that, if you want to get to the point where you can actually take an information from the market and process it, it’s very helpful to see how other people will take that same information and process it.
An easy way to do that is just to meet up with another trader every week. Go over your trades. Talk about what you’ve done. Your thoughts about what you did and see what they have to say. See what the other person has to say. It’s really a useful exercise for those of you looking for concrete ways to improve. Based on what we talked about today which is basically the discipline or lack of discipline in your trading.
Darren: Yeah. I get a lot of benefit from putting my trades out there. People questioning “Why did you do that?” It just made me stop and think. This is another level of me sort of reflected on what I’m doing because I’m going to be shown with other people thinking: is this some kind of inline with my goals in my trading structure.
Walter: Excellent. Well, I appreciate it Darren. I’d like to leave with the quote from, I think it was George Soros. You’ve reminded me, when you said “some of the best traders they do go hog wild” and you’re probably thinking of George Soros when he said “It takes courage to be a pig”.
He’s basically saying, there’s certain opportunities that will present themselves. When that happens, you just need to go in and I don’t know if I necessarily would do this. Typically, it’s like once in a lifetime or twice in a lifetime situation where you’d just go “Okay, this is it. We are going all the way in on this one”. It seems a little bit crazy but if you’re still convinced that you’re right, you might as well go down with your ego.
Darren: Yeah. I like that. I’m quite familiar, the least read to trader on the planet. I’ve read so few trading books. I don’t know all of his great quotes but yeah he’s talking about using your feelings in the context again. If you feel that if something’s happen that makes you feel strange someday a lot better than it was then maybe you should use that information.
Walter: Excellent. Alright. Thanks for your time Darren, we’ll see you next time.
Darren: Yeah. Cheers Walter.