Can a Trader Develop Discipline?
This article originally appeared in the Ask Jack column on Bidnessetc.com. Each article answered a question submitted by readers.
Given that discipline is the main characteristic of winning traders, can that be developed? Can someone go from a 5 or 6 out of 10 discipline level to a 8 or 9?
Yes, I really believe that traders can make such an improvement in discipline.
You can break down successful trading into two parts: knowing what to do and doing it. The second part is where the discipline comes in. Both knowing what to do in the markets and the discipline to do it are skills that can be improved with effort. But there is an important distinction: The limits on improving knowing what to do are much more restrictive than the limits on improving discipline.
You can certainly improve knowing what to do by reading extensively about market analysis and trading, closely observing the markets, experimenting with different approaches, and ultimately trying to develop a specific methodology. The crucial goal is to develop a methodology that will both provide an edge and control risk. The second part of this equation – controlling risk – is theoretically easy in that effective risk control can be summarized in a few simple rules and stated in a paragraph, and I would argue, in some circumstances, even a sentence. The difficult part of risk control relates to discipline. But even if we assume that the trader has exceptional discipline, there will still be a limit on how much improvement will be possible in the first half of the developing a methodology equation—that is, defining an approach that has an edge. Although effort will certainly help here, and some aspiring traders will succeed in finding an edge in the markets, many others may not, and not for a lack of effort. And even those traders who succeed in developing a methodology with an edge may be only marginally successful.
I believe the ability to develop a strong edge in the markets is an innate skill, which like any other innate skill, only a minority of the population will possess. To illustrate how developing an edge is dependent on innate skills, let’s consider some specific examples. How might an edge be developed? One way might be to design a quantitatively based strategy that is effective in exploiting a market inefficiency. Such an approach would require both strong quantitative skills and the creativity to find a way in applying those skills in beating the market. No matter how much effort you apply, you may not have the combination of talents to successfully develop such an approach. Alternatively, consider an intuitive approach to trading the markets. For example, just as there are people who are good at reading other people – a natural skill – there are traders who have superior intuitive skills in reading the market. It may not be something they can verbalize or explain; it is just an intrinsic talent. Some traders have it, and some don’t. If you don’t have it, you may not be able to develop it, regardless of effort.
What I’m getting at is that, at its roots, developing a methodology that will have a significant edge in the markets is dependent on innate talents, and although there may be a wide range in what those skills might look like, there will often be strong limits to the maximum degree they can be developed. To use a non-trading example that provides an apropos analogy, you may be a highly devoted runner, expending both long hours and intense effort in improving, but unless you have the proper body type, you will never be good enough to compete for a top-10 spot in a major marathon. It is the difference between what you can change and what you can’t. You can become a much better runner with strong effort and dedication, but you can’t become a champion runner without the right body type—again the difference between malleable skills and innate skills. Similarly, many traders may be able to achieve a marginal edge in the markets with sufficient work and dedication, but only a small minority may be successful in developing an approach with a significant edge because doing so may require innate skills that are not commonplace.
Improving discipline, however, is different from improving a market edge. There is no innate boundary preventing improvement in discipline. Theoretically, anyone can achieve an eight, nine, or possibly even a 10 in discipline. There is no natural limit, as there might be in developing a strong edge in the markets. To illustrate how one can achieve maximum discipline in the markets, let’s begin with the simplest case of a trading approach that can be spelled out in a list of specific rules. Although this assumption will not be appropriate for many traders, it will apply to a significant segment of traders. Ideally, in this case, the trader would computerize the defined trading rules in order to generate unambiguous buy and sell signals. Then trading would simply become a matter of following these signals absolutely without question.
I say “absolutely” because the task will be tremendously easier if the signals are followed without any exceptions. Once you open the door to any exception, then every trade signal can be second-guessed, creating a great deal of unnecessary emotional strain. The willpower to follow discipline will be much easier if you allow no exceptions. What about those situations in which there is a sound rationale for an exception due to a previously unanticipated reason? Simple, just change the rules to incorporate this previously unconsidered circumstance and follow the modified rules without exception. In other words, make the exception part of the system. Traders who find they just lack sufficient willpower to follow their own rules-based methodology can delegate the task of entering and exiting trades based on their signals to another person. In either case, whether trades are entered directly by the trader or delegated, maximum or near maximum discipline is achievable.
Admittedly, when the trading methodology utilizes a discretionary approach, achieving high discipline, let alone maximum discipline, is much more difficult. The reason for this greater difficulty is that discretionary trading decisions are rarely black and white, as they are in a rules-based approach. Thus, every trade becomes an assessment of probabilities, and this quality creates a difficult environment for achieving absolute discipline because it is often unclear whether the trader’s discretionary approach dictates position entry or not. But even though achieving strong discipline on trade entry is much more difficult for discretionary traders, even these traders can approach maximum discipline in trade exits. Why? Because trade exit can be made rule-based, even for discretionary traders. As a simple example, a discretionary trader could enter a stop-loss order for every trade right after it is entered. As long as a trader never widens the risk implied by this stop, maximum discipline would be achieved on the trade exits.
So, bottom line, the good news is that regardless of what kind of trader you are, it should be possible to achieve relatively high discipline—a degree of improvement that may not be possible for other ingredients in trading success.
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