Michelle B submits: The Disciplined Trader by Mark Douglas sits near my trading turret in a place of honor. Following rules is very problematical for traders. Having rules, and some traders have many, is not the same as being disciplined. A disciplined trader follows his rules, while a trader who has rules may not necessarily be disciplined enough to follow them. Trading without controlling emotions often takes the form of a vicious circle–the trader becomes ensnared in a trap of his own making, and it can be nearly impossible to break this viciousness. Sometimes, in extreme cases, the only solution is to take an extended sabbatical from trading. It can take a long time to heal the psychological damage resulting from trading without discipline, so it is much better to try to prevent this damage from happening in the first place.

I have read The Disciplined Trader around ten times, roughly once for each year I have been trading. It has been only with the most recent reading I could say I have finally grasped 90% of what he is trying to teach me to do. My focusing such a long time on trying to understand and apply what Douglas is saying may appear to be silly, but that is the challenging nature of the problem facing traders, and also the degree of psychological damage I sustained by trading without discipline when I first started.

Recently, I had reduced my trading rules to three, and I proudly presented this reduced list to my husband, who often plays the role of trading counselor. He was quiet, but his eyes said, two rules too many. So I had a think, and realized that the only rule is this one: Execute perceived opportunity according to my risk parameters. When a trader is surrounded by a flurry of rules, he wastes his focus and energy on not breaking them. They are actually a hindrance and not an aid. The rebel within says, no way, I am not going to obey these rules. Many rules also assuage the gnawing doubt that one does not really have a methodology, and therefore that problem, the fact that one’s methodology is non-existent, risks never getting solved.

The market is in constant flux. We cannot structure it according to our needs. We can only structure ourselves in relationship to this free flow of information and participant interaction. We are the money maker, not the market. Lack of discipline begets trading losses which beget lack of confidence which begets even deeper trading losses, etc., until your account balance is a mere shadow of its once robust self, and you are spinning within a black vortex of losses. To counter this vicious circle, one gradually replaces it with a virtuous circle, where honest recognition and acceptance of your existing skill level is the first step to take.

In the world of regular jobs, we strive to present ourselves in a favorable manner, sometimes creatively misrepresenting ourselves on our resumes, dropping names in job interviews to boost our image, and taking expensive and often useless continuing education courses so it can appear that we have an ‘edge’ in the job market. Our work culture encourages us not to accept and be honest about our present skill levels, not only to others, but to ourselves. If we admit our lack of perfect skill than we would be anxious we do not have what is required to compete successfully in the cut-throat job market. Not admitting this anxiety actually leads to what we fear, because we cannot increase our skill level if we are unable to identify and accept our present level so we can find out what to do in order to advance to the next level.

Douglas emphasizes listening to what the market is telling us what we need to learn in order to perceive the opportunities it is presenting, instead of listening to our preconceptions, often emotionally based. For example, a trader insists that a losing long position must return to his point of entry because it has already been there, without listening to what the market is saying about that probability. Being in hope mode means we forgo the opportunity to learn from the market, and all we do is stay locked within a lesser skilled level.

We don’t expect beginning pilots to fly huge planes at high altitudes all alone, and yet we expect that we can somehow do the equivalent in trading when we are first starting out. This common perception is fueled by the fact that making money by trading appears easy. It is possible that a trader can make the amount of money in an hour or even less which had taken several days to make at his previous job. This rather exciting aspect makes him think that trading must be easy; he does not need to have years of schooling and training as a surgeon needs to do in order to move up the salary ladder. He can just jump right in and mint the coin. Instead, he gives his money back to the market, again, again, and again, completely flummoxed as to why he cannot accumulate profits. Ironically, down the road, when he does trade in a consistently disciplined manner, making money does become easy–what he first thought it would be like before it turned into a nightmarish struggle with himself and the market.

Because of books like The Disciplined Trader and because of blogs written by more experienced traders, perhaps this vicious circle will never start for some traders, only the virtuous, where basic skill begets confidence which begets more skill, and then more confidence, etc.

If in a trade, focus on if you feel uncomfortable. If so, ask yourself why. Often you will reply because you are pushing the limits of your skill level, either by trading a very demanding stock, or with too big of a lot, or too many stocks at the same time, or too deeply margined, or without a methodology, and last but not least, without money/risk management (or all of these at the same time!). If you are trading within your methodology and risk parameters, and you are accumulating profits, but you are still uncomfortable, ask yourself why. The answer probably will be that you should be doing better, making more money. You are not pleased with the level of skill that you have developed, because you want to be a jet pilot making sonic booms in the clouds, and all you are doing, is just plodding along, like a lowly snail.

Be patient, pat yourself on the back, and focus on adding to your existing skill base, instead of detracting from it by taking on more difficulty than your present skills can manage. Create a virtuous circle from the very beginning, and nurture its development at all costs, because your mental capital is as precious as your financial capital. When beginning your trading day, focus only on trading well, that is, executing perceived opportunities within your risk parameters, and not on making money. The money will follow. If you focus on making money, then you will not be focusing on what makes you money.