The discipline rule

keyYou have to be disciplined to trade successfully; we all know that, and it’s one of the few pieces of trading advice that might apply universally. No matter what your trading style, market, timeframe, risk profile–whatever you do, you have to do it consistently and with discipline. It’s easy to overlook something we hear this often, but the reason this advice is so often repeated is that it really is that important. However, there is one little detail that makes all the difference–if you are going to be disciplined, you must be disciplined all the time.

So you make your trading rules, and you refine those rules. You monitor how they work in real time, and you make adjustments as necessary. Your job is now “simply” to follow those trading rules–do what the rules say always. Again, I’d be willing to bet that every one of you reading this knows what I just said is important, but can you truly say that you are disciplined every moment, in every interaction with the market?

Sometimes you will hear traders say they are “usually disciplined” or they “almost always” follow their trading rules. Wrong. You are either disciplined or you are not–it’s a yes or no thing. If you are disciplined 999 times out of 1,000, but you break discipline that one time, you are not a disciplined trader. There is no halfway, usually, mostly, or almost always–either you are or you aren’t.

This way of thinking is a good reminder because it forces us to be mindful of the damage we can so easily do to ourselves. All it takes is one slip–one trade held too far past the stop, one crazy addition to a losing trade, or one impulsive entry–to undo weeks of disciplined work. Not only can the financial impact be extreme (it’s not that hard to lose a month’s profits in five minutes), but the emotional and behavioral impact can be devastating. Once you’ve opened the door and done something silly, you are much more vulnerable to future mistakes. And, if you make money doing something stupid… well… that’s almost the worst possible thing that can happen to trader because you will do it again, and eventually the bill will come due.

So, that’s it. This is another one of those simple rules that is so easy to overlook: you must be disciplined, and you must be disciplined every day, every minute, every moment, and every interaction with the market. If you are not always disciplined, you do not have the right to call yourself a disciplined trader. Another simple rule, but one that can make all the difference in the world.

AdamHGrimes

Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 8 Comments

  1. Adrian

    Don’t want to get into a semantic war here, but I would say discipline and ‘art of trading’/discretionary trading/act on intuition are incompatible.

    1. Adam Grimes

      I would respectfully (and utterly and completely) disagree. I think the only way they are incompatible is with some misconceptions about what discretionary trading is and what the term means. It certainly does not mean you do whatever you want whenever you do it… think about what can and must be structured, and there’s the answer.

      1. Adrian

        (I feel no discomfort when someone disagrees with me, so no worries on that. And I would ask you to accept that there may be such things like disagreements and scrutiny of your ideas coming from otherwise very fans of yours. 🙂 )

        In my reading, of course discretionary trading does not mean that you do whatever you want, whenever you want. It means you do what you ‘feels’ to be the ‘right’ thing, not acting randomly, but consistent with your ‘personal style’, with your already established ‘strategy’.

        But, there is a problem using heuristics (heuristics based on our intuition, on our trading experience, on our ability to ‘feel’ the market, to ‘read’ a chart). Our minds are susceptible to systematic errors. Decision making can be influenced by a lot of factors (is this a cloudy/sunny day, did you just suffer some losses and now you try to recover that money, did you just find out some bad news on that recent phone call that you had, what emotions do you experience now, generally speaking – what’s the current chemistry of your brain). Based on the input (the stock chart that you look at), and based on the current state of your brain, an output (I will/won’t buy that stock) will arise. Because the state of your brain varies, it is well possible that looking at 2 very similar charts, at different moments you’ll make different and potentially costly decisions.

        There no such thing as discretionary trading. There are only traders’ discretionary decisions _in the particular context of the moment they made that decisions_.

        Now, I don’t say one can’t reach that stage where she is very consistent and able to silence all these factors that may induce noise in her decisions. (And I believe you if you tell me you reached that point.) I just say it’s very, very difficult.

        Let’s assume there is such a thing as pure chart trading more profitable than buy and hold and run in a discretionary manner. To me, this is like God, everybody talks about it as if it is real, but I didn’t see it yet. (And I talk about trading based on charts only, what an Average Joe like me could do; no inside info, no analysis of fundamental data, no sophisticated arbitrage, no front running; just looking at a chart).
        If this system exists, this system can be translated into a mechanical system. That’s always and mandatory true. If all you do is look at a chart (candles, moving averages, slopes, bands etc), there’s nothing un-measurable there. An algorithm, a clear step-by-step array of operations, can be created, and can be executed by a human, or by a computer.
        My question to you Adam would be: knowing how error-prone and context-dependent our brain is, instead of encouraging your blog readers to cultivate this intuition that would eventually allow them to read a chart and make an unconscious decision within an eyeblink, wouldn’t be better to preach them an effort to be aware of all the bigger and smaller details that make them think there’s a buy opportunity in that chart, to explicitly think about all the comparisons between different quantities they made before deciding there’s a long trade there, to make a clear checklist, to make a step-by-step set of simple operations, to refine this algorithm by analyzing more and more similar buy opportunities, in order to finally generate a 100% mechanical system, which if not that programming skillful to translate it into a script, your reader will still be able to run it by herself when deciding if an entry is desirable or not, removing that element of discretion, and being sure she will make the same choice no matter how she feels at that moment.

        If I may paraphrase, the problem with the ‘art of trading’ is that the art is in the eyes of the beholder. It’s subjective, un-testable in an objective manner on a large scale, and therefore, for me, not reliable.

        1. irdoj75

          Great comment, although I mostly disagree… 🙂

          Regarding translation into a mechanical system:
          I don’t think that is possible for now – the nuances of all factors are just way too much and mechanical systems are not yet there and maybe never will. And the funny thing is that our conscious mind is also not capable of it, thus no way to explicitly build such system or teach a computer to execute it. And I guess that is where intuition comes into play.

          Regarding looking at 2 very similar charts at different moments and making different decisions:
          I don’t think there is anything wrong with it – actually this is the desirable outcome of using intuition. The charts may be very similar, but some nuance may trigger different decisions (btw, they may be even exactly similar and triggering different decisions as you may have PF constraints or other considerations beyond the chart). What is absolutely to avoid is to have exactly the same chart at the same time (let’s say you look at it Friday after close and Sunday evening w/o any market news in between) and then come to different conclusions. Again, the final decision to enter/exit the trade may be different due to PF considerations or finding better candidates etc. meanwhile, but you should never come to the conclusion that it is a tradeable set-up on Friday but not on Sunday. I am far from proficient or being able to give anybody any lesson, but I believe to be fairly consistent on this – say I screen on Friday and see some candidates and I do the same with a different screen on Sunday and I pick the same candidates if they had appeared in both screens/sources.

          Regarding discipline:
          I’d go even further than Adam – you cannot say you are disciplined if you have not gone through a few years of trading including some high volatile phase without violating your rules… Discipline is probably one of the few things that you can really categorize as black/white without any shade of grey. The tricky point here is to have the right type, structure and content of rules, and to be very clear on what a rule is and what a desirable component is. You may e.g. set a rule to only buy pullbacks below EMA(20) or you may describe your picture perfect setup as such. In the first case, you’d violate your rules when buying above the EMA(20) even if you do it only once, in the second case you leave some room for discretion on this aspect and are “allowed” to buy sometimes above. Now if it turns out that out of 20 such set-ups you bought 18 times above the EMA(20), you are maybe not explicitly violating a written rule, but you are not aligned with your theoretical set-up, and it is either time to adjust your set-up or make sure you follow it in the future (e.g. by allowing for only 5 out of 20 trades to buy above?). Otherwise you are clearly not disciplined.

        2. Oleg Foight

          This is a very interesting post; you brought up a very good point.
          I too believe that everything on a chart is measurable.

          Suppose my exits are completely discretionary based on “market feel”. So how can I evaluate my discipline in that regard? I can’t.

          Too many discretionary elements in one’s trading does sound like God in an atheist’s perspective. I completely agree.

          I believe profitable traders who claim to be discretionary actually have many mechanical elements in their trading process. There may be so many moving pieces in their process, that they are just unable to formulate it.

          Perhaps a true discretionary trading style would only rely on luck..

  2. PA_trader1

    I too agree that you can be discretionary and disciplined. I don’t see any connection between the two. Infact both are necessary traits to become a successful trader (if you follow discretionary style). Also as people reading this blog are aware that discretionary is style of trading and if it doesn’t suit oneself then one can look at other style.

    Indeed discretionary isn’t that easy (I am too learning) but I believe that’s the best way of trading and for me only way of trading. It’s easy to comprehend the concepts but difficult to implement and that’s where the “art” comes into the picture. You as a decision maker under the discretionary style are a synthesizer of various aspects and so it can’t be put into code language. I can go on & on with my thoughts but it all reflects teachings from this blog and playbook (daily newsletter). But it will require lot of efforts from your side too.

    Regarding discipline…i can write 100 times that I am disciplined trader but its useless. Its only when you are in front of the screen and you execute as per your earlier targets/SL then you can call yourself a disciplined trader. So best records is your own P&L sheet which shows these levels.

    Cheers..and happy to be a discretionary (Waverly) trader.

  3. Adam Grimes

    There is a great discussion here in the comments below (and hopefully one that will continue.) If you are the type of person who doesn’t usually read the comments, make an exception in this case, as the comments (points raised both in agreement and in disagreement with my blog post) are considerably more insightful than my original post!

    I agree with much of what Adrian is saying: discretionary trading is very, very difficult. Discretionary traders are subject to many outside influences and cognitive errors. Accepting some degree of intuition into your trading process is to invite certain kinds of errors into your trading process. I would almost agree… and I’ve been all over the place with this idea over the past 15 years… that any chart-based system could be trained into some type of algorithm. If we can do complex facial recognition, with the proper training an algorithm could capture much or all of what a trader might see in a chart. That training of the algorithm, and the algorithm itself, would probably be very complex indeed.

    Some of this argument boils down to a disagreement over whether mechanical or discretionary approaches are best. This argument is probably an eternal argument and people on both sides of the fence believe in their position with almost religious fervor. In my experience, discretionary trading is extremely difficult, but so is mechanical trading. People underestimate how difficult it is or how fleeting the edges they find may be… and also the degree of discretion that is required in purely systematic work.

    Regardless of what you do… you have to be as disciplined and consistent as you possibly can be. There is no goal at which we will someday arrive; there is only the ongoing journey toward that goal… the eternal aspiration to be better than we are now. In my opinion, that’s what drives our advancement as traders, and as humans.

    Good discussion here, and a great illustration of how disagreement can highlight some important truths. Read the comments below. 🙂

  4. PA_trader1

    I am not sure whether I have read it on this blog that the mechanical systems was developed by the person to help themselves to ease their work. Whereas we as a new trader just pick up one system which we find to be in favor of our market view and trade accordingly. I think this is where the issue of mechanical system comes. Following blindly….but I am still of view to follow the discretionary style. The simpler (not too simple) it is better it is.

    Adam isn’t the very purpose of jotting down your thoughts and observation is to remove all those errors in trading? I think that’s where the notes help to review all these errors and try to avoid them in future. Again “discipline” will play a big role and as one need to avoid earlier mistakes.

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