Staying Disciplined Is Tough for Traders. This Approach Will Help
Breaches of discipline are inevitable, so let’s get to the core of the problem and ways to fix it.
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For the last two weeks, I’ve been writing about discipline. First, it was setting and honoring stops; then it was how to get back on track when discipline breaks down and the Market Beast punishes you for it. This week I want to look at where discipline comes from, because most traders have it wrong.
Kristjan Kullamägi, one of the most successful momentum traders of the last decade, once made a comment that got me thinking. “It’s not a discipline problem, it’s a confidence problem,” he wrote. “Discipline is the most overused word in trading.”
I don’t completely agree, but he is onto something important. Lack of discipline isn’t some character flaw you are born with and stuck with forever. It has causes, and once you understand them, you can address them.
Confidence in the Method, Not the Stock
Kullamägi’s point is that traders break their rules not because they lack discipline, but because they don’t trust the rules they set. They promise to use the 10-day moving average as a trailing stop, then sell on the first downtick before that level is ever tested, or ignore it when it finally breaks. Both mistakes come from the same place: The traders have no confidence in their own rules because they have never put in the effort needed to be confident.
The key issue is that confidence is about your methodology, not any particular stock. Traders tend to develop an emotional attachment to stocks they spend a lot of time studying and watching. All that effort makes them feel they know better than the market, and when the stock breaks down, they don’t take the stop. They defend the stock instead of following the method.
I recall years ago a stock called Rainforest Cafe (the ticker was RAIN). A group of traders on the Yahoo message boards knew every obscure fact about the company, like the average wait time at the Las Vegas location or the latest menu change. They were so consumed by these details that they ignored the stock’s poor performance. They knew everything about the restaurants and nothing about the stock. Eventually it was swallowed up by Landry’s, but I bet many of those folks still love that place.
Hours spent studying can build confidence, or that time studying can build attachment. From the inside, both feel the same. Study one setup across thousands of stocks, and you build confidence in the method. Study one stock for months, and you build a relationship with it. The stock doesn’t know or care how much time you spent on it.
The Fear of Finding Nothing
Part of the problem is that many people don’t know how to look for new ideas. They don’t have an approach that filters through thousands of names, so when they find something they like, they latch on to it. They are afraid that if they let it go, they won’t find anything else.
The cure is a process. When you scan the market regularly and see a steady flow of new candidates, no single stock is that precious. For me, one of the things I love most about trading is the hunt for new stocks. No other business offers such a consistent flow of ways to make money. The trader who can find new ideas doesn’t have to marry them.
However, you have to be prepared for times when there’s simply nothing worth buying. That isn’t a failure of your process. It is your process working. Selectivity isn’t a bug. It’s a feature.
How to Build the Armor
The armor is a methodology you trust and apply consistently. Study setups, not stories. Kullamägi asks how many traders have spent 500 hours going through thousands of historical examples of one setup, and he guesses maybe 5% of his audience. Combine the study with small trades, because theory alone won’t do it. Be consistent. I’ve said before that any rulebook is better than no rulebook, and that astrology will work just fine if you apply it consistently. And keep a journal, so you can see your rules working over dozens of trades and not just the one that hurt.
Following the rules builds confidence, and confidence makes the rules easier to follow. Over time, discipline stops being a matter of willpower and becomes a habit.
Emotions Will Still Win Sometimes
None of this makes you immune. Stanley Druckenmiller lost $3 billion of Quantum Fund’s money chasing tech stocks near the top in 2000, and when asked what he learned, he said he didn’t learn anything. He already knew not to do it. He was “just an emotional basket case and couldn’t help myself.” Even Kullamägi admits he still struggles to follow his own rules. “Happens to me too,” he says, “but it happens less.”
That is the realistic goal. You will never eliminate the impulse to let things slip, but the more you study and the more consistently you apply a systematic approach, the less often it wins. And when the armor fails, mark your positions to market, make a new plan and get back to work.
Lack of discipline has a cause, and every cause can be fixed. It takes time and effort. But if it were easy, it wouldn’t have the potential to make you rich.
At the time of publication, DePorre had no position in any security mentioned.
