Discipline is NOT the most important thing in trading!Virtually all experts agree that discipline is the most important trait of a trader. All of them, except for me
A closer look at this popular opinion has shown that it is wrong. One trait is much more important than discipline, and it is evident in the best traders.
At first glance, it seems clear that discipline is the most important in trading because there will be no results without it. Thus, a trader must be disciplined and must execute entries and exits correctly and on time.
Ask any expert and trader what is the most crucial trait in trading, and 95% of them will tell you that discipline is the most important.
I firmly believed this, especially since this is what the authorities in the industry say—starting with Mark Douglas' book "The Disciplined Trader".
Logically thinking, strengthening discipline should lead to better and more stable results. I found exercises that help with this. Many traders started to use them, but the effects were not as good as I expected. Even worse, sometimes the discipline just disappeared—despite adequate effort and exercise!
We didn't understand why this was happening.
Here are three short stories of traders that led me to solve this puzzle.
Trader 1:
He is undoubtedly disciplined, has proven it thousands of times and has made millions in the market.
One day, after being particularly emotional in the market, he cannot get back into the market. Reducing his positions to a minimum does not help. The discipline that accompanied him for years is gone. He is not able to withstand the pressure.
I asked myself: what happened to his ironclad discipline? Why did it suddenly disappear?
Trader 2:
He sees the signals building up but is unable to join the market. He knows how important discipline is, and he knows he could make an impressive profit. But he is unable to break even. He has previously proven himself to be disciplined, dutiful and hardworking because he has consistently built a large business. Now he can't stand the pressure of the market.
What is the reason?
Trader 3:
He identifies the signals well and opens the trade correctly. Moments later, the problem begins. He loses confidence, stops "understanding the market", fear and hesitation appear. He runs away from the position. If he could maintain discipline (he knows it is essential), he would make money. But he can't.
Again the question arises - why?
Under the pressure of the market, discipline crumbles like a house of cards. In the past, simply strengthening it often did not lead to any improvement. But, slowly, we began to understand that we need to look deeper in search of something more.
Working in consulting taught me one thing: if you want to understand something - research the best. Find out how these traders differ from the average and what makes them successful. And when you know that - you can start teaching others. So I tested it, and it was a huge step forward.
It turns out that the best traders are different
Especially the "crème de la crème." A study of several hundred institutional traders gave me great insight. The traders themselves indicated what qualities a narrow group of the best of them had.
The members of this elite were indeed different. They were able to maintain discipline under almost any conditions (unlike the rest). They stuck to their plans, executed them despite obstacles, turmoil, often chaos in the markets. Others were not able to - emotions consumed them.
The best traders had a different approach to situations that caused strong emotions. They tried to cope with them, using several techniques to reduce their emotions. The others focused on avoiding such events.
The best traders were not as concerned about failures as the others. They recovered more quickly from losses, whether in a single session or over more extended periods. When the day was good, the elite had more entries than the rest, who gave up once they had executed their plan. Whatever was going on, the best traders focused on their projects and tasks and ran them. It was simple, but the others could not do it.
The results of the best were more significant and stable. They had no trouble increasing their positions when there was an opportunity, and emotions didn't take away their logical thinking.
Once I gathered plenty of such research and analysis, I began to grasp what this was all about.
The best traders were able to perform even under prolonged pressure. It didn't affect their thinking and acting the way it did the others. The best were just tougher - they had a much stronger psyche than the rest.
Then it became apparent that pursuing discipline as a critical trait for a trader does not make much sense. Instead, you need to build other characteristics, focus on the best traders and teach that to others.
In short: the best traders are much tougher mentally - they have more resilience than the so-called mental toughness. Nevertheless, mental toughness is the most important because discipline on the market under pressure simply does not exist without it.
Without mental toughness, you will not be able to maintain discipline in the marketplace. Without it, discipline under pressure simply does not exist.
If you have a discipline problem in the marketplace, then 99% of the time, it's not a discipline problem at all!
Traits of the supreme traders, the true elite.
The traits that institutional traders have pointed out in their best peers can give us more light on what they are like and what to develop in ourselves.
Below I will discuss some of these traits and how to develop them in yourself. I have spent over 15 years as a consultant. I prepared and implemented many corporate training and development projects; I helped people develop the necessary qualities and skills.
The ability to react quickly to emergencies.
Making good, sober decisions in the conditions of surprise, the pressure of losses, chaos on the market and around.
Markets can be volatile. The best traders consistently outperform the others in reacting appropriately to situations that cause the others to panic. The best can stay focused despite the obstacles, distractions and emotions around them. The best can respond quickly and advise others on getting out of a difficult situation.
These skills can be developed. Read more about this below.
Discipline that doesn't fade under market pressure
"Everyone has a plan until they get hit hard in the face," says Mike Tyson.
There is a difference between the average trader and the elite. The best continue to execute their plan even when they get walloped by the market.
A situation that would completely break down an average trader in case of the best one will cause at most a temporary emotional reaction, followed by sober action.
This is the critical difference. The best traders remain disciplined despite emotionally charged events, sudden news and high volatility.
Research shows that they use different strategies to manage their emotions, are more confident in themselves and their abilities in pressure situations. These skills can be built and strengthened in anyone.
The ability to focus under pressure. The ability to refocus when something unexpected happens
Focus is needed to execute the intended plan no matter what is going on around you. For example, a simple mistake when opening a position size can result in a position ten times larger than intended.
The best traders are not distracted; they know what to do when to do it and how to do it. They know what to do, when to do it, and how to do it.
Such focus is essential because others can't do this and need time to calm down. Sometimes even half a day is wasted because of uncontrollable emotions.
In a moment of intense stress, most people find concentrating next to impossible. Stress shuts down thinking and focus. The stress response is a rapid automatic mobilization of muscles for action: fight or flight. Here, thinking would only get in the way. Therefore it is eliminated. Our minds and bodies have worked for thousands of years in this manner, and we cannot change it. However, you can learn to reduce the level of this reaction by applying techniques used by the best traders.
Aggressiveness
When talking about a trader's aggressiveness, we have two things in mind:
Following the best moves to maximise, e.g. by so-called pyramiding (adding more positions to a profitable move).
The ability to join the market in a controlled manner with a much larger position based on the best signals and moves.
Both skills require experience, market knowledge and intuition. The best traders may have the same systems as the others, but they can use them much more, to the maximum.
Just this one element puts their performance on a whole different level.
In both cases, the pressure is much greater, and it takes much mental toughness to stand up to it.
A bank trader placed a large position. The market moved against him, he loses over a hundred million dollars at one point, but he did not leave the market. This situation meant that he had to explain himself not only to local management but also to the head of the bank.
He did so. He patiently explained what factors led him to invest so much. He had to manage not only his emotions but also the emotions and fear of his superiors. He succeeded, and the position ultimately made a considerable profit.
Experience, emotional maturity and intuition
The experience that traders talk about has two aspects. The first is the ability to apply knowledge about the behaviour of markets practically.
The second aspect is emotional maturity - practical knowledge and the ability to manage one's emotions
Here the best ones are very different from the rest. They are prepared for their emotional reactions, face them and act on them. Weaker ones avoid emotional situations, run away from emotions, e.g. leave the trading room to calm down.
The best traders never avoid emotions. They have many strategies for dealing with emotions that may arise and those that are already there.
When it comes to intuition, it is the sum of accumulated experience from hundreds, sometimes thousands of hours spent observing news, markets and price behaviour. However, you need to exclude strong emotions because they block the intuition mechanism to access this level.
How do you develop these traits?
In the face of new research, many traders will want to strengthen their psyche to have better results, work lighter and feel less stress.
The simplest way to improve your performance is to emulate the best. In corporate consulting, we have used a simple, effective method: find the best and teach others what they do for you if you want a good result.
From here come some practical tips.
Controlling the stress response itself
I would start building mental toughness by learning to reduce the stress response itself.
This modern approach teaches the trader what the stress reaction looks like and how to control it. Then, no matter what happens - the trader will be able to fend off the building stress.
The benefit is immediate - chaos, volatility, even panic all around will not take away your sobriety of thinking, focus and discipline.
We cannot predict many situations that cause strong emotions: news, statements of important people, disasters, or terrorist attacks. As a result, markets will go into "panic mode."
Regardless, a trader with a position in the market, controlling emotions will not make stupid mistakes.
And the best will go even further, because as one trader told me, "panic markets are the most predictable". I know that when others are panicking, he will take advantage of strong movements to the maximum.
Controlling focus despite distractions
Another element of training would be learning how to focus (and refocus when something distracts us). Equally important is the ability to maintain a long focus in situations of noise, emotion and chaos around us.
The key question here is - focus on what?
There may be many answers (because traders have different tasks). However, the most important one is: focus on the execution of the plan.
The plan should be prepared in advance, and it should be executed in a situation of pressure and emotions.
We think best and soberest when we are not under pressure. Separating planning and execution is a step toward good decisions and good plan execution.
The best traders have good, well thought out plans.
Of course, weaker traders have plans too, but they often abandon them under the impact of events. The best traders don't do this. Instead, no matter what happens, they try to stick to their plan because they know it's the best they can do at the time.
Elite military units are known for their legendary mental toughness, much less their careful planning and mission preparation.
Navy Seals operators know just what to do in each situation despite the often deadly threat. They know because they have practised it many times, planned and executed. During a mission - they focus on what they are currently supposed to do.
Their psychologist sums it up this way: "Professionals focus on the process and amateurs focus on the outcome." That goes for any type of professional.
"Professionals focus on the process, and amateurs focus on the outcome."
Changing the attitude towards losses to that of the best is the third element necessary in training.
Strong reactions to losses can permanently damage the psyche, so it is worth knowing how the elite traders deal with this problem. I devoted much attention to this during my interviews with traders while gathering material for my book.
I identified the five most important "best practices" that the best traders have. They include preparing for a "big loss" as a preventive measure, being indifferent to the outcome and sticking to their process (always mandatory), trading within their "comfort zone with losses", and treating losses as a step forward.
For the best, at least one of these practices is always used and sometimes several simultaneously.
This approach to losses protects the psyche. In my opinion, this is just as important as protecting capital. I have seen many traders bounce back after losses because they have good trading skills, but they cannot. Their psyche doesn't allow them to. Sometimes you can do something about it, and sometimes you can't. As a result, losses have ended the careers of many market stars.
The training should lead traders to find a suiting solution that will allow them to approach losses as a necessary part of the game calmly.
I am thinking here of a kind of "buffet", on which we will put the methods used by the best and let everyone choose and test what suits him. And he'll keep doing it until something works.
Strengthening, stabilizing self-confidence
I would see learning to maintain and boost confidence as the fourth element. It helps with hesitation when opening and leading a trade. Such sureness is one of the most direct ways to increase mental strength quickly.
From time to time, the best traders also need a boost. At the level of cash they are handling, hesitation can lead to substantive losses, which in turn lead to trouble on the mental side.
Self-confidence can be built in several ways, and the simplest is to recall situations when we succeeded.
At the same time, it is advisable to maintain a balanced approach, as overconfidence always leads to losses. Every top trader I've talked to has mentioned this very thing.
How do you get past the glass ceiling level where stress builds up strongly?
You can have a great system that beautifully identifies perfect entries. However, when you start making more money, you are in for an unpleasant surprise. The so-called "glass ceiling" - the size of the order, at which suddenly stress will strongly increase.
The pressure, of course, leads to losses. Traders solve this differently; most often, they reduce the position size to what they find comfortable.
However, this severely limits profits.
Stress on larger positions also blocks opportunities for advancement. Often a fund will require a trader to have experience trading much larger positions than they are currently capable of.
We have found some techniques that can deal with this problem. But that's a story for another time.
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