Discipline in Trading and Investing
Apr 21, 2005
by Joe Ross
The one thing I can think of that most affects both trading and investing has to be self-discipline.
Being disciplined is fully 50% of the job of trading or of investing. I don’t care how good your trading system is, without the discipline needed to follow the system you don’t have much of a chance for success in meeting your goals.
It doesn’t matter how great a planner or organizer you are, without discipline your plans will most likely fail to bear fruit.
Controlling Your Ego
Discipline involves self-control, and self-control involves your ego. If you want to succeed, you must learn to trade without your ego getting in the way.
Don’t be fooled. A person’s self image must be separated from his trading or his investing. When your personal self-worth gets tangled up with your business activities, it not only wrecks your best trading or investing intentions, but it also damages your self-esteem.
You hear and read about great traders and investors who have done amazing things. They tell about how great they are. They talk about “The Big” trades they made. They talk about “Big” numbers. It all derives from their oversized egos.
Don’t be misled. Sooner or later, there are “Big Downfalls.” It goes with the territory.
For a moment, let’s look at the results of what a huge ego can do. Due to his oversized ego, Nick Leeson brought down the Barings Bank. Victor Niederhoffer ran his fund into deficit. John Merriweather was so sure his strategies would work that he ended up threatening the health of the entire banking system by betting more than fifty times his capital that he could forecast, without any chance of a loss, the direction of various bond markets.
As we study the examples of these three men, there seems to be a pattern of temporary real success followed by a collapse for themselves and for those caught up in blindly following them.
Here are the kinds of problems that arise from putting your ego into the mix.
Not putting in stops: You don’t want to be proven wrong
Hesitation before entry: You want reassurance before you act
Overtrading: You want to prove how really big you are
Not getting out when you should: You have married your trade and just don’t want to get a divorce. Getting out would mean you were wrong
Adding to a losing trade: You are making a massive effort to prove you were originally right
Grabbing a profit too soon: You want affirmation that you did the right thing
Missing an opportunity because you can’t pull the trigger on a trade: You are still living with past mistakes.
In my 47 years of trading, I have seen great traders and investors come and go. All too many of them lost everything they had ever made. The great W.D. Gann died a pauper. The legendary Jess Livermore was flat broke when he committed suicide.
I have known dozens of traders who lost money because their egos got in the way.
I agree 100% with the following statement by Marty Schwartz, the great S&P 500 daytrader:
“I’ve said it before, and I’m going to say it again, because it cannot be overemphasized – the most important change in my trading career occurred when I learned to DIVORCE MY EGO FROM THE TRADE. Trading is a psychological game. Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself. You have to stop trying to will things to happen in order to prove that you’re right. Listen only to what the market is telling you now. Forget what you thought it was telling you five minutes ago. The sole objective of trading is not to prove you’re right, but to hear the cash register ring.”
To that I would add, “trade what you see, not what you think.” You cannot afford to get your ego or your opinion involved in your trading activities.
Because both trading and investing are uncertain businesses of probabilities filled with uncertain outcomes, a huge ego or a fragile ego can easily get smashed. Defending your ego saps you of energy, distorts your perception, and will eventually destroy your business.
If your self-esteem is connected to your trading and investing choices, if it goes up and down with the results of your activities, you and your business are in trouble. Your self-image needs to be strong, not at the mercy of the outcome of your trading or investment choices.
To succeed in the markets, you have to have confidence in what you are doing and confidence in yourself. But self-confidence must not become confused with self-image. Remember not to marry a market or a trade. If you see you are not right, be quick to get out. Run your trading or investing as a business. Practice self-discipline. You’ll be glad you did.