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The Art of the Trade: Respect For Discipline
In today’s column, I’ll discuss discipline and what it means for the trader. Every book talks about having discipline but few break it down and explain what it really means. I’ve known traders that have made millions in their careers. They’ve had tremendous skills and were respected by their peers. I’ve known other traders that had the same skills but had nothing to show for it. Why did one trader make money and the other not? Let’s take a look:
The first trader used his skills to build a career. He developed a methodology that worked specifically for him and stuck to it. It might have been complex or simple. It didn’t matter. He had the one component that’s universal to all great traders; they know how to manage a trade. Not just winners but losers as well. Before making the trade he knew the exact entry and exit.
He knew how to “message” the trade. What does that mean? He’d buy a few units to see how the market reacted. Intuitively, he’d add a few and start building a position. He never bullied the market, by trying to push it in his direction. If the market reacted positively, he’d press, adding and subtracting with the ebbs and flows. He never seemed to mind selling a few when the “rubber band” was stretched too far. However, he’d always keep his original idea intact.
He was also realistic. It wasn’t about having a trade that made a fortune but one that worked and reached predetermined levels. If he was wrong he got out, simple as that. A bad trade didn’t define him. It was just a bad trade. He was always confident the next one would be good.
He not only used his skills but he also incorporated a set of rules of discipline. Most importantly he never varied from those rules. His formula translated into making money consistently over a long period of time.
The second trader used his skills much differently. He was great at picking the right trade but he didn’t manage it well. He bought his full boat right away, never scaling to see how the market reacted. As the market moved in his direction he never had an exit strategy. He always seemed to think the trade was going to be a huge winner and didn’t want to “give it away”. When the market retraced, he wouldn’t admit he was wrong and would hold on to his position. His winning trades often became losers. Sadly, this trader never seemed to have the kind of money that was commensurate with his talent.
His mindset was always short term. He never had a strategy for making money over a long period of time. Sure he made great winning trades but he had nothing to show for it.
Discipline is a state mind not a formula you just plug in. Respecting the trade and its potential is what makes you successful. Understanding your specific goals is the first step. The skills can be learned. However, without discipline your long-term success cannot be achieved.
Stay tuned for more discussions on the “Art of the Trade”.
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Loren Newman, an independent trader and a member of the CBOE. He's actively traded and taught for over 25 years. He's a co-founder of LaSalle trading, one of the first electronic trading firms in Chicago. He's taught and mentored traders in a variety of venues including proprietary trading. He recruited traders from major universities and helped guide them to be successful in the ever-challenging world of trading. He's also guest lectured at Northwestern University.