Why traders lose their discipline

When traders lose money, they often attribute the
problem to a lapse of discipline. Such a lack of consistency, however, is
actually the result of many different problems–not the cause. Traders lose
discipline with trading for the same reasons that dieters lose discipline with
dieting or people getting in shape lose discipline with exercise. Quite simply,
our moods, needs, and mind states of the moment tend to overwhelm our
longer-range intentions. We pursue short-term pleasures (and avoid short-term
discomfort) at the expense of longer-term rewards.

Here are some common reasons why traders (and
most other human beings!) fall short of being fully intentional:

  • Environmental distractions and
    boredom cause a lack of focus
    – All of us have
    limits to our attention span and these are easily taxed during quiet times in
    the market;

  • Fatigue and mental overload create
    a loss of concentration
    – The demands of
    watching the screen hour after hour make it difficult to be sharp, creating
    fatigue effects that are well-known to pilots, car drivers, and soldiers;

  • Overconfidence follows a string of
    – It is common for traders to
    attribute success to skill and failure to situational, external factors. As a
    result, a string of even random wins can lead traders to become overconfident
    and veer from trading plans–especially by trading too frequently and/or
    trading excessive size;

  • Unwillingness to accept losses
    – This leads traders to alter their trade plans after trades have gone into
    the red, turning what were meant to be short-term trades into longer-term
    holds and transforming trades with small size into large trades by adding to

  • Loss of confidence in one’s
    trading plan/strategy because it has not been adequately tested and
    – It is difficult to tolerate even
    normal drawdowns unless you have confidence in your methods. This confidence
    does not come from mere positive self-talk. Rather, it is a function of
    testing your methods (historically and in real-time) and seeing in your own
    experience that they truly work;

  • Personality traits that lead to
    impulsivity and low frustration tolerance in stressful situations

    – Psychological research suggests that some individuals are more impulsive
    than others and less conscientious about adhering to plans and intentions.
    These personality traits often are accompanied by stimulation-seeking and a
    high degree of risk tolerance: a deadly combination.

  • Situational performance pressures
    – These include trading slumps and increased personal expenses that change how
    traders trade and lead them to place P/L ahead of making good trades. By
    worrying too much about how much money they make, traders can no longer follow
    markets with a clear head;

  • Trading positions that are
    excessive for the account size
    – This is much
    more common than is usually acknowledged. It creates exaggerated P/L swings
    and emotional reactions that interfere with cool, calm planned behavior;

  • Not having a clearly defined
    trading plan/strategy in the first place

    Interestingly, many traders do not consider themselves to be discretionary
    traders, but in fact do not have a firm, explicit set of trading rules that
    they follow. It is difficult to be consistent with a plan (and to evaluate
    your consistency), if you don’t have the plan clearly laid out;

  • Trading a time frame, style, or
    market that does not match your talents, skills, risk tolerance, and
    – All too often, traders veer from
    their plans because those plans are ones that they feel they *should* follow,
    but that don’t truly come naturally to them. These departures from discipline
    are actually unconscious attempts to trade in a style that is more in tune
    with the trader’s skills and talents.

As you can see, not all discipline problems have
their origins in the trader’s psychology. Many times, the loss of discipline
reflects problems with trading itself. Discipline in trading is not so
different from “discipline” in a romantic relationship: if you’re doing the
right things, there’s little need or desire to stray. But if your trading is
not meeting your needs, it’s all to easy to break your trading vows!

Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of

The Psychology of Trading
(Wiley, 2003). As Director of Trader
Development for Kingstree Trading, LLC in Chicago, he has mentored numerous
professional traders and coordinated a training program for traders. An active
trader of the stock indexes, Brett utilizes statistically-based pattern
recognition for intraday trading. Brett does not offer commercial services to
traders, but maintains an archive of articles and a trading blog at
www.brettsteenbarger.com and a
blog of market analytics at
. His book, Enhancing Trader Development,
is due for publication this fall (Wiley).