10 Points -Why Traders Lose Their Discipline

  • 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 successes – 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 losers;
  • Loss of confidence in one’s trading plan/strategy because it has not been adequately tested and battle-tested– 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 planful 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 personality – 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.