LACK OF DICIPLINE IN TRADERS

LACK OF DISCIPLINE IN TRADERS



Let’s say you are new to futures trading. Or let’s say you have traded futures in the past without much success and have decided to start fresh with a new approach and a clean slate. And you’ve done it all and followed every step. You have:
• Determined how much money you can truly afford to risk
• Opened a brokerage account with that amount of cash
• Settled on a diversified portfolio of markets
• Developed a trading system in which you have complete confidence
• Developed specific, unambiguous entry and exit criteria
• Back-tested your system and have generated good hypothetical results
•Walked your system forward, paper traded it over new data and have generated good results
• Sized your account so that you reasonably expect no more than a 25% draw down

• Built in risk controls including stop-loss orders to minimize your risk

You’re as ready as you can be. With high hopes and great anticipation you place an order to enter your first trade. So what happens next? Well, if you are like many traders the first three trades you make will be losses. After the first loss, you’ll say “no big deal; it’s part of trading.” After the second loss you’ll think “I wonder if I’m doing something wrong.” After the third loss you’ll tell yourself
“some thing’s wrong, and I need to regroup.” You will have no idea why your system has suddenly fallen apart.

So you decide to go flat and skip the next signal, a buy signal. Two days later the market that you should be long explodes to the upside leaving you in the dust. You tell yourself “it’s too late to jump on board now, so I’ll just wait for the next trade,” relieved at least that your confidence in your system has been restored. So you wait for the next signal from your system. And you wait and you wait and you wait. And in the meantime that market continues to tack on gains virtually every day. Your system is doing great, but you on the other hand are not doing
so well. You start mentally adding the money that you should have made on this trade to your account and say “I should have this much in my account now.” But every day your account balance remains the same, while that market just keeps rising higher and higher. By the time you enter the next trade you have a missed a $5,000 winner. And the next trade is another loser.


If you are one of the lucky ones, at this point your loss is relatively small, you conclude that you are in over your head, and you decide that enough is enough. You close your account and walk away, joining that fateful 90%. For the rest of your life whenever the topic of futures trading comes up you step forward like a  eteran with a purple heart and tell your “war story:” “yeah, I traded futures, listen to me kid.......” Or maybe you don’t quit so easily. If you are one of the unlucky ones, you keep trading, suffer more indignities at the hands of the futures markets, and lose even more money before your account is finally laid to rest. And so it goes for 90% of the people who enter the exciting world of commodities speculation. 


Given all of the potential pitfalls that we have discussed so far it is easy to understand why the person who decides to “take a shot” and is completely unprepared fails at futures trading. But what about the trader in this example? He was completely prepared both financially and emotionally to do what was necessary to succeed and still he failed. Why does this happen to so many traders sincerely dedicated to “making it work?” In most cases it is because although they were very well prepared when they began their new trading program, somewhere along the way they failed to do what was needed. They failed to have the discipline to pull the trigger (or to not pull the trigger as the  ase may be), and they either suffered a loss or missed a huge profit. With many traders this can cause an emotional “domino effect” where the trader’s primary focus is no longer on following his plan to achieve his long-term objectives. Instead, his primary objective becomes getting back at the markets for causing him to lose money or for taking off without him. Or maybe his objective is simply to get back to “break even” before walking away.Becoming bent on getting even is a perfectly natural response to a kick in the teeth. Unfortunately, it is also a sure-fire way to fail as a futures trader. A lack of discipline is defined as failing to do what you should do in a given circumstance. There is probably not a trader alive, successful or otherwise, who has never suffered because of his or her own lack of discipline at some critical moment. What separates those who make money in the long run from the other 90% is:

• The financial and emotional capabilities to survive a breach in discipline.
• The willingness to learn from mistakes and to never repeat a mistake already made.


A lack of discipline in futures trading is always a mistake. This is true even if your lack of discipline actually saves you money by skipping a trade or exiting early, or if it allows you to capture a windfall profit by taking a trade against your approach, doubling up on a losing trade or holding on after your trading method tells you to exit. Imagine, you fail to follow your plan and you come out ahead. This leaves you ahead financially for the moment but consider where this leaves you psychologically: “I broke my own rules and made some money.” All is well and good in the short run but what happens the next time a critical juncture is reached? Do you trust the approach that you spent so much time developing and refining (and which in the back of your mind “failed” you the last time around, while you, Mr. Super trader, instinctively knew it was going to fail so you heroically took matters into your own hands and won the day), or your own “gut” instincts?


The most cruel paradox in futures trading is that a trader’s short-term successes can plant the seeds of his long-term failure. Believe it or not, one of the worst things that can happen to a first time trader is to have great success right off the bat. In the long run you may actually be better off if you struggle a little at the outset, develop some respect for the markets and weather some early mistakes,
than if your first three trades are big winners and you decide you’ve got “the touch.”



 Why Do Traders Make Mistake


 A lack of discipline in trading is almost always the result of one or more of the three great obstacles to trading success:

• Fear
• Greed
• Ego


Every time a trader makes a decision regarding any element of his trading he is subject to the effects of fear, greed and ego. This does not imply that we all need hours of serious therapy. It is simply human nature taking over. We all want to make money (thus we feel greed) and we don’t want to lose money (thus we feel fear). Cutting a loss is extremely tough on the ego. Once you cut a loss on a trade there is no chance to recoup that loss without entering into an entirely new trade. This explains why cutting a loss is often such a difficult thing to do. How many people enjoy going around and voluntarily admitting mistakes, especially ones that cost them money? Not very many. It simply goes against human nature. Yet when trading futures it is often exactly the right thing to do


These emotions are at times so powerful that they can cause you to do all kinds of foolish things:


• You bail out of a trade prematurely with a small loss simply because you don’t want to risk a bigger loss (fear/ego).
• You stop trading altogether during a draw down—right before things turn around (fear).
• You take a profit prematurely because you don’t want to give it back, thereby missing a big profit (greed).
• You double up or increase your position size in an effort to get back to break-even or in an effort to “make a killing” (greed).

How To Avoid Mistake

Of the four biggest mistakes in futures trading, a lack of discipline is the most difficult mistake to avoid. The other mistakes detailed in this book can all be dealt with before you start a trading program. You can lay out every step of your trading program down to the last detail. But then you must pull the trigger. That is when Mistake #4 comes into play. As a result, the opportunities to make this
mistake are limitless. A lack of discipline occurs while you are in the line of fire.
Picture a new soldier who goes to military school, boot camp and engages in other extensive training. Then suddenly he finds himself in live combat for the first time with somebody shooting real bullets at him. Now consider an individual new to futures trading. 

LACK OF DISCIPLINE IN TRADERS

 

He has planned everything and knows exactly what needs to be done in order to ensure his long term survival. Then he suddenly finds himself in a difficult situation, with real money—his money—on the line. How people react in difficult situations cannot be known until that time arrives. Hopefully their planning and preparation will allow them to overcome any psychological obstacles. But you never know for sure how they will react until the moment of truth arrives.Just telling yourself to put fear and greed and ego aside won’t do the trick. You must identify the points within your own trading plan where you will most likely confront these obstacles and make plans to avoid their negative effects. For example, if your approach requires you to interpret chart patterns, you need to define your rules very carefully to remove as much subjectivity as possible. If you do not, you may find yourself interpreting the same pattern. differently at times. If your trading has not been going well lately it may be easy to find some perfectly justifiable reason not to take the next trade. Likewise, if you are planning to use mental stops you must prepare yourself to always follow through and to place orders as needed. If you fail to do so, then one bad trade can do you in.



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