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Discipline is often cited as the key to success in trading, while a lack of it is often blamed for trading problems. I understood the general idea, but an operational definition was lacking.
The true meaning of "discipline" is often misunderstood. Here's my counter argument:
Discipline is more of a personality trait than a temporary surge of emotion or static achievement where someone just "becomes disciplined." Each of us are disciplined to some degree, though to varying extents.
Let's break down the concept of discipline into three sub-segments with regard to trading:
Discipline to Avoid the Risk of Ruin
Everyone would agree that protecting your portfolio from ruin and big drawdowns are the most important aspects of trading. To reiterate, the general points include:
- Always trade with a stop loss**
- Do not trade in illiquid and penny stocks
- Don't buy based on tips from anyone, regardless of your relationship with them or their reputation
- Do not take large positions in stocks before results or major events if you do not have a profit cushion
- If consecutive trades are not performing well, either reduce your position size or pause trading to review
These rules cannot be tampered with and are essential for survival as a trader. Breaking any of these rules, even with a 0.0001% chance of losing your capital, is like a ticking time bomb. Any sane trader won't trade without following this discipline, even with a gun pointed at his head.
**(A hack given by an 76-year-old trader friend: If you're ever tempted to ignore your stop loss, sell the stock anyway and wait for 5 minutes. If you realize you should have ignored the stop loss, you can buy it back with a revised stop loss. But if you wouldn't buy it again, why would you want to hold it below your stop loss?)
Discipline of Process
These are the daily habits that need to be integrated into your trading life for improvement and execution. You are most prone to breaking these habits when you experience low motivation or low energy during bad trading days or after long work hours.
The habit loop in Atomic Habits by James Clear has been very effective for me.
For example - Maintaining and updating my trade journal used to be tedious and boring for me, particularly since I deal with Excel sheets all day at work. I started keeping my Journal excel open and minimized while trading (Cue). I entered the trades into my journal immediately after executing them, instead of waiting for the weekend (Routine). A Ferrero Rocher was my Reward.
It is important to continue optimizing or streamlining these processes and not be more disciplined than necessary to achieve your objective. Traders have a tendency to overwork themselves and repeatedly burn out. To maintain disciplined execution, energy must be conserved.
These are often small decisions, such as Steve Jobs' choice to wear only turtlenecks and jeans. This was not about branding, but rather about conserving energy - making one less decision everyday. Similarly, I want my charts to be displayed in a specific format, use a mouse that clicks the way I am used to, and align my second monitor to my left eye turned at 45 degrees. Or the bigger ones like- collecting new scanners, books and courses (the trading porn collection), or taking too many trades because there are good setups in a bull market or watching every minute of the chart like a hawk.
In fact, I am amazed by some Fintwits who are able to tweet gyan along with ~40 charts every week - some even at market open - and still remain active in their telegram groups, all the while trading with focus and sharing MTM screenshots.
Discipline of Breaking rules
When you start trading, it is normal to copy the rules and methods of other traders, especially to avoid the risk of ruin. However, I often see traders treating these rules as if it is their holy grail, and becoming a "Rule Nazi" as a badge of success. In fact, if the WHY behind a rule is not understood, having good discipline can be catastrophic in the pursuit of excellence.
For example:
- Does a breakout only occur when patterns are formed or a trend line is broken? In fact, relying on trend line breaks to buy is inefficient. The trendline area is typically crowded with order clusters, leading to increased slippages and unfilled orders as you scale up your portfolio.
- Many quants assign scores/weights and derive a formula to qualitative aspects of price action (base time or quality, upmove %, range contraction %, Earnings growth %) to identify stocks to buy/sell.
Rules that are static and do not align with market participants decisions to buy or sell are flawed. It is like putting a table fan in the sea and hoping to create waves. In fact, these are often the areas where breaking discipline could be beneficial (without risk of ruin). You need to gradually tease these rules out, so that they can be corrected.
And then there are rules to reduce the variables in decision-making. However, these rules cannot be perfected. They can only be optimized through years of screen time, mistake rectification, and creativity to find a reasonable sweet spot that aligns with each individual's personality.
For example:
What should be the position size to sell at a certain R or % when in profit? When do you increase your % risk on trades and become aggressive? (In an interview, @markminervini mentioned taking 4x intraday leverage on a position in USIC in 2021). How do you prioritize the stocks to buy when there are a plethora of good setups breaking out? What do you do when your capital is tied up in slower-moving stocks and you see a 5-star setup breaking out?
In these rules, you can never be completely right. You can only be "correctly imperfect" because these outcomes can never be standardized. What you think of as mistakes may actually be a feature of a trading style. So, don't beat yourself up for temporary underperformance. Improving your instincts through experience over time is often the only way to solve such subjective trading problems. An effective way for me to improve has been through reviewing my trades in both trade journal and an anti-journal (i.e. winners that I could have taken but missed or chose not to - Refer post on 28th June).
The most significant lesson I learned from @Qullamaggie and @markminervini, who are the foremost proponents of discipline, was how limited my thinking had been regarding my trading goals and adherence to rules.
The entire objective of getting into trading was to achieve freedom, but in the process, traders often get chained to their self-made rules. They find good trading boring because they have turned it into a chore instead of using it to showcase their creativity. After a certain point, trading becomes more about creative visualization and imagination than discipline.
The deeper I delve into this craft, the more amazed I become. It's not about making money, although that is the primary goal. It's about the excitement of the treasure hunt I experience every evening when I scan the market to see what will be revealed the next day, and whether I'll be able to find it again if I miss it.
Takeaway
Paraphrasing @jaredtendler - “Traders are similar to artists in that they seek creative freedom. However, artists need tools like paintbrushes and chisels to create, and their creativity is limited by their ability to use them. By improving their technique to use the tools, artists can unlock their full creative potential.
In the same way discipline is a tool that you use in trading and if you’re not continually upgrading your abilities with the tool, your potential is capped.”