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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT... More
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Michael C. Thomsett, author
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Getting Started in Stock Investing and Trading
  • Self-Discipline Risk, A Risk Every Investor Faces 0 comments
    Feb 2, 2014 11:00 AM

    Traders hear about all kinds of risk, but one specific type is common to traders at all levels, but rarely if ever discussed. Are you the victim of "discipline risk?"

    Most traders and investors are. You set rules for yourself but make the mistake of breaking them later, based on how prices change. For example, you buy shares of stock with the intention of selling under one of two circumstances. If the price rises, you will sell when you reach your goal. If the price falls, you will bail out when you have lost a predetermined dollar value or percentage.

    In practice, however, when the price rises it's tempting to hesitate, thinking perhaps the price will continue rising. Even when it eventually begins falling, you cling to this hope and miss your chance to double up. When the price falls, you don't bail out, but hold on hoping to get back to your starting point. Eventually, the price declines even more and you end up losing more than you can afford.

    In this all too common scenario, there is no point at which you can exit the position. You have programmed yourself to never take profits or limit losses.

    Discipline risk is chronic for even the most experienced investors and traders. By being aware of it and resolving to stick to your own rules, you are more likely to succeed in your trading program.

    To gain more perspective on insights to investing observations and specific analysis, I hope you will join me at ThomsettStocks.com where I publish many additional articles. I also maintain a virtual portfolio of stock at ThomsettStocks.com. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site to learn more.

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