The First Rule of Trading Success: “No emotion = Discipline”

When I think back on my career, one of the most important breakthroughs to my success was mastering my own psychology and deciding that it was more important for me to stay in business, than to be right.

Decisions can change our life, sometimes for the better and sometimes for the worse. The awareness needed to take the right path for ourselves starts with understanding who we are and acknowledging what we really want. In trading, as in life, wanting to make money comes at a price. Knowing what we have to do to get what we want is the first step; the second step is to do what it takes… And to do it right, without cutting corners.

In business, success takes work, self-control and discipline. In trading, self-control and discipline come before the work, and are imperative to survive.

“When you don’t know what matters to you, then that becomes what is the matter with you.”  We must first decide whether we are a trader or an investor. Both are committed to making money. Both are subject to the same emotional experience. Both look at the same data.  However, the tools, the thinking and the execution are completely different. Traders rely on technical analysis while investors concentrate on fundamentals. Traders think in short term positions while investors consider the long-term outcome. Traders act quickly on small moves in price to lock in profits, and investors prudently position themselves to gain from major macroeconomic moves. Changing from trader to investor when we are losing money is incredibly risky, psychologically dangerous, and financially disastrous.

Today, traders are inundated with various predictions and prognostications from analysts and economists. It becomes very difficult to refrain from forecasting and forming an opinion in the mist of this intense flow of information. But predicting is the biggest trap in the quest to making money because the moment a trader focuses on forecasting what is going to happen, his ego takes control. How much money he may lose becomes less important than being right. Hence, from the start, the one thing a trader must give up is his ego.

The hope of succeeding in trading, the dream of getting applause and admiration, as well as the desire to get rich quickly, all these attractive feelings are like the sirens' bewitching song and end up draining a trader's account. These emotions result in shame and failure, instead of success.

Evidently, markets are driven by psychology and the perception of what is going on. Most news is designed to affect investors’ behavior and reactions. Though times do change, the psychology of men and their emotions remain the same through the centuries and the one constant in all markets is human nature. Technical analysis uses pattern recognition to study price history in order to anticipate the next move. That is the easy part. The most difficult element in the work of a trader is to control the emotions which can play havoc with our thinking and perception.

What a trader feels in minutes or seconds are the same emotions an investor feels in weeks. Hope and wishful thinking become greed in periods of gains. The opposite emotion, fear in times of losses, has the effect to distress the mind to an extreme, as panic replaces hope and turns into despair.

To achieve success in trading, survival is key. Staying in business demands a clear mind and a focus on capital preservation. It is not the place for opinions, predictions or wishes. There is no room for dreaming. A trader's job is to get the information and analyze the charts in order to enter a position, immediately followed by a stop loss, placed at a strategic level. The first question to ask is not, "How much money can I make?" but rather, "At which level am I wrong?"

No hope, no prayers, no ifs and no maybes. Attention should be on the direction of the price thrust and the direction of the velocity. Accepting being too small to matter in the sea of money going in or out of the market is important too. There is no way we can make a difference, even when trading tens of millions a day, as I have done.

As a trader, we must be content to only participate in a small part of the move and book profits, even if the price continues to advance without our involvement in it.

Have you ever wondered why a price may go up on bad numbers? Perception moves the markets. When news is out, the interpretation of its meaning might propel the price with a high velocity in the direction of the herd's implied understanding. If the trader did not participate in that first thrust, he may wait for a retracement brought about by some people taking early profits or others in disagreement with that move. The rule is to see if that pull back is happening with much lower velocity, which implies entering when the level is less stretched, for the continuation of the initial forward advance, with a stop just below it.

Having the self-control not to let emotions or opinions interfere with a strategy remains a matter of discipline.

The business of trading is to make money, a little bit at a time, and accepting a small loss to avoid a bigger one. No matter what we think should happen, it is better to refrain from having an opinion, because it is dangerous to our wealth. Instead, when we go with the flow of money, when we respect the trend as our friend, or better yet, as our master, things get easier. When we bow to the power of the price and we follow its lead, we reap the rewards of obeying the market's will. There is no shame in the admission of being insignificant. Once we accept that, the gains in trading will compensate for suppressing our ego…

Finally, there are times when, even with the highest probabilities on our side, the market does not behave as expected. We can't control where it goes; what we can control is our attitude towards risk. When we make the commitment to execute perfectly a prepared plan, the perception of ourselves becomes positively influenced by our discipline, and our results show that this humble behavior is working wonders. In fact, losing the ego is key to winning and making money consistently in the business of trading.

The book “Reminiscences of a Wall Street Trader” shows that my success had a lot to do with following this very first trading rule: "No Emotion = Discipline!"

We hope you can join us at this week's webinars where you can learn more on how to improve your  trading.

This week's webinars are:

• The Critical Trading Errors - Tuesday 15th April @ 5pm Los Angeles, 8pm New York, 10am Sydney (next day), 12noon Auckland (next day)

                                                                           &

• The Five Pillars of Trading Strategy - Wednesday 16th April @ 3pm New York, 8pm London, 5am Sydney (next day) and 7am Auckland (next day)