Everything that has been discussed so far in the anatomy of success is based on the assumption that one has the discipline needed. Discipline, or a lack of, has a great impact on trading. Discipline is the biggest reason for the high failure rate in trading.

This is why the ability for someone to follow a trading plan 100% for 1 week regardless of the results obtained on a day to day basis, is one of the most difficult things to accomplish as a trader that is new to the game. Why? Because as soon as the trading strategy results in a losing day we immediately begin questioning the strategy and this completely pulls the rug under out feet where we end up not consistently following the trading plan for the remainder of the week.

I cannot tell you how many times I decided to follow a trading plan from Sunday and by Tuesday I was already looking for a new trading strategy. The inability to follow a trading plan in most cases ultimately comes down to a fear of loss which is one of the biggest challenges facing traders. Its amazing in the world of trading how one could have 4 great days of trading and as soon as a losing day comes we are already feeling emotionally distraught.

However it is important at this stage to also understand that we need to be sure that our trading strategy has an edge. There is no point trying to develop discipline when the strategy we are following is already flawed. Discipline and psychology is there to help you simply survive long enough for your edge to eventually play out. When your edge plays out then this is like a fuel station scenario which helps to refuel your confidence. However if you have no edge then ultimately your discipline and and a strong mindset will eventually erode because over time there is simply no evidence that your strategy actually works and as finite emotional beings there is only so much we can take in terms of attacks on our emotions from losing.

So before discipline and psychology is even discussed there has to be an assumption that you have a trading strategy which has a combination of probability and risk reward in its favor.


When it comes to trading psychology, in order to be successful in the market trader must master loss aversion.

Loss aversion is being unable to accept a loss in a trade. Loss aversion causes you to deviate from your trading plan. You might have a trading strategy that allows you to win about 60% of the time producing a certain amount of profitability after each week or month of trading (accounting for winners and losers). The problem is, by not adhering to risk management rules, and letting a trading loss grow, losses become bigger than originally calculated. Those additional losses, even one each week, can turn a profitable system into an unprofitable one.

We fear loss because our brains do not assign the same weight to a $100 loss as it does to $100 gain. The happiness at finding $100 on the street doesnít equate to the frustration of opening your wallet and realizing you lost $100 you needed to pay for something. Think of it this way, not having a relationship with someone isnít as painful as having someone and then losing them. Our brain typically assigns 2.5 times the weight to a loss, as it does to a gain (Kahneman and Tversky, 1979).

We donít like to lose, and statistics show the majority of humans will gamble in order to avoid a loss. In the 1979 study by Kahneman and Tversky, participants were asked if they preferred a $7500 loss, or they could ďroll the diceĒ for a 75% chance of losing $10,000 or a 25% loss of $0 . Most opted to gamble. In trading terms this is like moving your stop-loss. You can take your loss, or let it mount. If you let it mount there is a possibility you may get back to even, but there is a good chance youíll end up losing more because youíve already be proven wrong on the trade.

The real problem is that if you get back to ďevenĒ after gambling in this way, your behavior is rewarded. You did the wrong thing (you went against your trading plan and your stop loss rules) and it worked out. But most of the time it wonít. Itís a trap, and it lures in new traders and casino gamblers alike.

The unfortunate part is that there is no easy fix for loss aversion. Losing sucks; as humans we donít like it and it results in a steady stream of trading problems. The good news is that there is a solutionÖitís just not easy.

Where the issue stems from doesnít matter, ultimately you need to conquer it. That doesnít mean you wonít want to avoid losses, it just means you accept those feelings and donít let them affect your actions. It is within your control.


Therefore, the big step in managing loss aversion goes back to trading discipline and the ability to follow a trading plan which is built around ensuring your risks are minimized. If you get into a trade and donít know how you will handle it if it moves in your favor, against you, or does nothing, then you shouldnít be in the trade at all. Your plan of attack letís you know what you will do in each scenario. It also letís you know which trades to take and which to avoid. Trading in a systematic way with a trading plan must be associated as trading like a robot. You have to imagine that you are computer algorithm simply following pre-programmed rules.

That plan must provide details on how you will enter and exit positions, and then you must follow that plan no matter what sort of emotions you face while in those trades. Know there will be a strong compulsion to let a loss mount because you donít want to realize/book the actual loss, due to ego or some other reason. You will feel these things. Admit it, and try to continually bring yourself back to your trading plan, letting the plan play out. Do this in a demo account until you are like a robot at following your plan. Only then should you switch to real moneyĖstart out trading with the smallest position size possible so it is easier to maintain your robotic focus. Expect emotions to crop up again once you begin trading with real money.

If you have adequately tested your system, and it is profitable, then realize that the results of that system account for losing trades. You donít need to avoid themĖthe losses are already factored into the profitability, so you donít need to change a thing. Take your loss when you are supposed to; stick to the script. Thatís the only way to realize the profitability of your system.

It easier said than done though. Therefore, I recommend all new traders, or any trader who is having trouble sticking to their trading plan, put out a programmed stop loss exit and profit target at the outset of each trade. Then donít touch anything. Watch, and simply sit on your hands. Donít touch your trade, donít touch your screen, just sit on your hands until either your profit target or exit stop gets hit.

Follow this method for at least several weeks. It will get you used to the feeling of discomfort, and most of all it will prove to you that your system is profitable just as it is, without your intervention (assuming it is actually a profitable system to begin with).

Not succumbing to emotional moments, and seeing a plan through is what creates great traders, great leaders, great generals, etc.



The key to success in trading is the ability to accept losing a battle whilst knowing you are winning the war

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