How to maintain discipline in financial trading

Securing an edge in financial trading is the eternal quest of financial traders. Faster internet connections and particular sector knowledge may offer some participants a leading edge in some markets some of the time. However, when it comes to maintaining discipline in applying successful strategies it can be more important to adhere to psychological well-being and to avoid the pitfall of cognitive distortions.

A cognitive distortion takes place in our minds when we have an upsetting experience and we think about it in a way that reinforces negativity and feeling bad. Typical examples of such distortions, relevant to financial trading, are polarised thinking (viewing events in black or white thinking), jumping to conclusions, catastrophising and mental filtering (such as ignoring positive outcomes whilst concentrating only on negativity). Such biases can negatively impact on your decisions to go long, to short or stay out of the market.

Successful traders will maintain that discipline is the single most important aspect of their winning strategy. They will wait for the right opportunity. They will not allow impatience to rule their thinking and to force a trade. They will specialise and wait for the market to form, will notice the trends and spot a promising trade. The opportunity to place successful trades in the long run will occur if you are patient, when there has already been a significant move and you spot the potential for capitalising on tick volatility. Traders who display impatience will invariably fear that they will miss out if they don’t seek to pre-empt particular moves in the market. Seeking to pre-empt market moves can potentially lead to behaviour that is closer to gambling than disciplined trading.   

If a trade goes wrong successful traders will exit that losing position as quickly as possible, even if it means accepting losses. Discipline involves the ability to learn to cope with the pressure when things go wrong (as they inevitably will do from time to time, even for winning traders). Discipline is essentially being able to maintain emotional management.

That sounds simple enough but it is not easy in practice. If your trading strategy is to exit trades when a certain predetermined price is reached it is not easy to close a trading position and to accept losses. It is far easier to opt for the hopeful strategy that the market moves will return in your favour. This may occur in some cases but it is not a successful long term strategy.

Why is it so hard to accept losses? 

We respond very differently to losses than we do to achieving gains. Research by Professor Kahneman and Amos Tversky show that we feel the pain of a loss far more than we feel the pleasure of a gain. That might explain why traders and gamblers double up and chase losses as the pain of a losing trade in that moment is seemingly unbearable.  

The immediate impulse to win back a loss can wreak havoc to a profit and loss trading account. Being aware of the fundamentals of behavioural economics can help traders to limit such losses. In the moments following a losing trade it is important to stop and take time out, rather than doubling up and immediately seeking to recover a loss. 

Let's take a look at what can happen when a losing trade occurs 

Poor emotional management occurs for traders when they allow their fast, intuitive system to make decisions that should be the remit of their slower logical system. Losing money can impact our survival system and can lead to anxious physical sensations. This is when you might experience buzzing or clenching in your head or jaw or faster erratic breathing. Your hands might begin to feel clammy whilst your posture becomes increasingly angular as you watch a trade go wrong. Your thinking can more easily become pessimistic, untrusting, suspicious, one-sided and narrow.

Taking account of the bias of loss aversion, however, can help prevent the kind of reckless risk taking that can typify the behaviour of a trader when discipline is lost and losses begin to mount. 

How counselling and psychotherapy can help

Counselling and psychotherapy can help to address and fix cognitive distortions so that you are less prone to such biases when trading. Counselling sessions can also help to identify and further develop your untriggered safe zone. Your untriggered safe zone is when you are calm and organised and feeling optimistic. Being in this state of mind is when you ordinarily make profits easily.

The more you operate from your untriggered zone, the more successful your trading could be. You leave your untriggered state when chasing loses and become fearful or angry. Such emotions are not conducive to rational decision making. Successful financial trading is dependent on good discipline and awareness of the triggers of entering an emotional danger zone.