Focus and Discipline
A school teacher hurt his back and had to wear a plaster cast around the upper part of his body. It fit under his shirt and was not noticeable at all. On the first day of the term, still with the cast under his shirt, he found himself assigned to the toughest students in school.
Walking confidently into the rowdy classroom, he opened the window as wide as possible and then busied himself with desk work. The classroom was a bit unruly and he tried to get them to quiet down several times, but to little avail.
As he was trying to work, a strong breeze made his tie flap annoyingly, he kept rearranging and rearranging the tie, but nothing worked. As he was asking the kids to quiet down one more time, he also became disgusted with the wayward tie and he stood up and took a stapler off his desk and stapled the tie to his chest in several places. Discipline was not a problem from that moment on.
Having a great trading and game plan and the best trading rules in the world is fine and dandy, but it wont help you a bit if you cannot stay focused on them and have the discipline to follow them. If you are a person who gets easily distracted you will have problems trading, no matter how good your trading and game plans are. As you know, the game plan is supposed to help keep you focused on the trading plan, but you need to stay focused on it if it is to work.
Staying focused encompasses many things from developing your plans, to following them, to reviewing them, to keeping from overtrading and staying within your money management rules. As soon as you begin slipping up in any aspect of trading, your bottom line will begin to suffer.
One of the reasons professional traders do well, is because trading is their sole business and they have fewer outside concerns. Im referring to traders who work for firms. Theyll get a salary and a nice one, too, and do not have to worry about where their day-to-day money is coming from. Sure, they are concerned about their fat bonuses, but its more of a dangling carrot than a distraction. The everyday guy trying to trade has so much on his mind that it can be hard to stay focused. For starters, some people try to day-trade while having full-time jobs. Ive known quite a few lawyers, doctors, accountants, receptionists, drummers, firefighters, and so on, who try to day-trade while doing their other job as well. Its impossible to stay on top of things when you cannot devote your full attention to trading. There are thousands of housewives who have tried trading in between dropping the kids off at school and going about their regular business. They, too, have little chance of success because they cannot focus just on trading. If you are in a position and a baby cries, or a client calls, or you have to perform a root canal, you cannot stay focused on your trade. Sure they were great traders when the market went straight up in the late 1990s and all they had to do was buy and sell higher, than buy even higher and sell even higher. But put them in a normal trading environment and they will most likely not be able to focus enough to make money.
Another reason the pros do well is because unlike some new traders they do not need to make money in order to survive. They may need to make money in order to keep their jobs, but they can trade without the stress of having to make enough money to cover their mortgage. Someone who is putting up a good chunk of their own money to become a day trader and has no other source of income, is constantly concerned about his financial well being. His concerns will distract him from being focused on trading and will cause him to slip up more frequently. Not to mention he will be more likely to lose discipline if he tries to make more money than he should and trades beyond his means if money becomes an issue for him.
I recently opened a bar (Tequila Jacks) in New York City. The week before I did I cashed out of a lot of money. Then I tried to make one last big trade on February 27, 2008, to give myself some extra money to play with. I put on a nice size option trade in the S&Ps, and the next day the market plummeted (see Figure 17.1) due to problems in Asia and I blew, pretty much, the whole premium in a day. I wasnt even able to watch the trade as I had to go to the Department of Health and the Department of Consumer Affairs to get permits for the bar and outdoor seating area. So instead of having an extra $50,000 to $100,000 cushion, I lost about $20,000 in two days, all due to me losing my discipline and making a trade I normally wouldnt simply because I wanted more money. I also ignored my money management parameters by risking more than I normally would.
Buying the bar has been a huge distraction, which has caused me to stop trading for a period of time. Im a pretty hands-on kind of guy and I oversaw the whole renovation, staffing, setting of policies, creating the menu (we have great Mexican food if you are in the area), and quite a few other things. As such, I devoted most of my time to the bar, then I had to write this book and was not able to concentrate on trading as well. I tried to for a couple of weeks, but I wasnt able to spend the time I needed on game plans every day so I wasnt as effective. Nor did I have time to make a new trading plan that would let me trade on a longer term basis. So for a few months I stopped altogether to concentrate on my bar and occasionally the book. The place began to run itself and, much to my editors chagrin, I ignored the book and was able to get back to trading. However, now I have to finish the book because I already asked for two extensions and I believe my editors are beginning to lose patience. So I will have to cut back on trading if I dont want to trade half-assed. I still look at the markets every day, but unless I see something extraordinary that I think can be a longterm move (by long-term I mean at least a week or two) I just look at the market to help with the book. I do know I didnt do great during the period in which I wrote High Probability Trading, so Id rather be safe this time.
J U S T T W O M O R E D A Y S
As Im reviewing the book just before handing it in, I just want to say this is one of those chapters I wrote out of orderall of the trades I talked about in the middle part of the book came a few months after writing this chapter. But now I have two more days before I hand it in and that makes me a happy camper. I didnt make a lot of trades in the last few months. But I did okay and now Im eager to get back into it full tilt. Until I buy another bar or restaurant, of course. The market has been insane lately. Today the Fed had to bail out Bear Stearns, and the market plummeted after being up 400 points the last two days.
It doesnt matter what is distracting you, it could be illness, depression, financial woes, kids, trying to buy a house, a bad marriage, or even the opposite, you could have just met someone and fallen in lust and are giddy with joy, constantly daydreaming about the person, getting nothing done. And worse, you can be going through both a bad marriage and a fantastic new lover at same time. Regardless of the reason, if you arent focused you will not trade well. Making and keeping to a game plan are time-consuming, and if you cannot spend the proper time doing it, your trading will suffer.
HAVE A ROUTINE TO HELP YOU WRITE A GAME PLAN
Not only do you have to be disciplined in trading but you also have to have the discipline to write your game plan, make your scenarios, and review your trading every day. When I traded full-time I had a routine that helped me do this. Every day after the markets close, I got up and went for a walk around the block, I would buy a candy bar and grab a can of Coke. After sitting for most of the day, my lower back compressed and I also needed to stretch my legs out. That walk really helped loosen me up and allowed me to stay focused on trading for another hour after the market closed so I could start on my game plan for the next day. Then when I was all done Id take a nap.
Besides the bar and the book Ive also became a stay-at-home dad for the last three years. As part of my routine now instead of taking that walk, Ill take the kids to the park for an hour as soon as the market closes. Just for the record, there is nothing as amazing as being able to watch two babies grow into little people. Its hard work but definitely puts a smile on your face. Its one of the main reasons I stopped day-trading and started trading longer term. I wanted to be able to spend time with them. I do have a nanny come in every morning to help out if Im trading, otherwise, Id have no time for anything. But I know for sure I will not have the time to get back to serious trading until my daughter heads off to preschool in a few months.
My problem has always come in the morning because Im a late-night person. My normal bedtime has always been, even as a teen, between two and three in the morning, and I can function fine on five hours of sleep, so long as I take my nap every afternoon. I only need an hour in the morning preparing and my commute is from the bedroom to the den/office, so I dont need to wake up super early, though Id prefer to sleep in till 10. My routine is the same every morning. I go to the bathroom at 7:58 A .M.; un
fortunately, I wake up at 8:00 A .M. But seriously, after using the bathroom I sit in front of my computer and go through any news and charts that will help me and start writing my game plan and coming up with scenarios for what Im looking at. I usually finish this by about 9:00 A .M . and take a shower. And Im ready to go by 9:20. I do not like to initiate any trades in the first 30 minutes of trading so I eat breakfast during this time while I look at the markets and see how they feel. Maybe my morning trading has suffered because I dont get a full eight hours of sleep, but I refuse to believe that.
Having a routine as you prepare to trade will definitely be an asset as it gets you in the habit of doing what you need to do. Unless you do the same thing day in and day out, its hard to stay focused on creating a game plan.
FOLLOWING YOUR PLAN
Not only must you be disciplined to write your game plan every day, but you have to follow it. By making the game plan you are giving yourself a clear direction in which to trade and a huge advantage over traders who lack one. Whats the point in taking the time to write it all down if you are not going to use it or stick to it? But its not always easy to do so. You can get distracted or change your mind, or completely ignore things and your game plan is worthless. However, if you are one of those who can stay disciplined and follow his plan then you will have a good chance of being a great trader. If you are undisciplined and cannot follow a strategy, I dont believe you have a chance of being successful no matter what you may think.
HOW TO STAY FOCUSED IF YOU HAVE TROUBLE STAYING FOCUSED
Now, I do not know if discipline is something you either have or you dont. Can an undisciplined person learn to become disciplined? Maybe, but its going to take discipline to learn to become disciplined. And if you dont have it to begin with you, you will have trouble learning it. But there are some things I think you can do to hopefully help you get there. First of all you have to have that trading plan and game plan. They are the most important steps in being disciplined, as you cant be disciplined if you have nothing to be disciplined about. The discipline factor comes into play when you can follow those plans without second guessing yourself. If you are having problems with discipline here are a couple of things I think can help you develop it.
Make a set of simple trading rules and make sure you follow them. If you start by making rules as simple as you can it will be easier to follow those rules. Keep track of how you do when you break those rules and how you do when you follow them. If you do this you may see a pattern of how you do when you stick to the rules and this may cause you to become stricter in following them. If your rules or strategies tell you to exit a trade once it reaches a certain area, get out and dont question it. Once you can do this repeatedly you will start being disciplined.
Keep and Analyze a Journal
Very often overlooked or thought of as beneath people, a journal is one of the most helpful tools a trader can have in recognizing patterns in his behavior, which can lead to better discipline. Its not just keeping a journal thats important; you need to review it to analyze your trading. Just by taking the time to keep a journal every day and for every trade you will gain discipline. But the real discipline will come as you learn to analyze how you did versus your trading rules and game plan. Look for the number of times you followed your rules or not. It doesnt matter if you made money or not, the goal is to get that ratio of following your rules to not following them higher.
Trade Your Style
You will never be disciplined if you cannot follow your strategies. It gets harder and harder to follow strategies if they are against your style of trading. So if you want to work on discipline only trade with strategies you are comfortable with.
Monitor the Markets
Set aside a time to monitor and review the markets every day. Do it like clockwork, whether or not you traded them, and not only will you gain discipline, you will learn more about what makes the market tick. Discipline means doing the same thing over and over again and this is just one method of learning it.
Concentrate as hard as you can at being consistent, whether its in every day things like going to the gym or in the way you trade. People who go to the gym on a regular basis, eat right all the time, and never smoke are disciplined people. If you want to improve your discipline join a gym, set an hour to go, and just do it every day.
When it comes to trading try to make the same trade in the same situation everytime. If you vary your trading for no reason and buy one morning on a gap lower open and sell the next on a similar gap lower open, you have no consistency and therefore no discipline.
Dont Trade over Your Head
It is easier to stay disciplined when you are trading and risking the proper amount for your account size. Once you start trading beyond what your account can really handle, you may make foolish decisions if a trade goes awry. Keeping to the right risk will mean you have a better chance of sticking to your game plan as panic and fear will become less of a factor.
Learning the Expensive Way
Some people think they are disciplined as they paper trade and follow all their rules to a T. But once they step up to real-time trading, everything goes out the window. Paper trading is good to a degree but it cannot get you the experience you ultimately need. One way to gain that experience, and its not free, is to actually practice trading with real money. This is going to sound a bit unorthodox, but find the cheapest market or stock you can, by that I mean one with small range and lots of volume like corn or SIRI. Make yourself a simple strategy with several trades a day. Trade just one contract or 100 shares and practice. After a couple of weeks youll probably be up or down $1,000 at most. Thats not important, what is important is that you learn to follow your rules to the letter and get real-time experience. If you get an exit signal, sell without a thought. If you get a buy signal, buy without hesitation. Once you are doing this correctly and consistently, you will have gained some discipline. If you cant do this, go into real estate or something else, because you wont make money trading. Its like when I wanted to become a better poker player. I started playing at low-stakes tables and practiced my discipline. That meant only playing the hands that had a high chance of winning. It was boring but effective. Learning and practicing at a low-stakes game is much more effective than doing so playing online with no money (paper trading), or playing with stakes too high where you cannot concentrate on doing it right, instead of how much money you are making or losing. Money can be a distraction, but if you make the money minimal and you lose, as you are very likely to do at the beginning, take it as a lesson or tuition for a class on discipline. If the stakes are too high then that lesson will be quite expensive, plus your emotions may just get in the way.