News & Analysis

Six Steps to Improve Trading Discipline – #2 Prioritise and Identify your cause

24 September 2019 By Mike Smith



In a previous article we introduced the SIX steps to improving your trading discipline and offered some guidance on developing “awareness” with a downloadable ‘checklist’ for you to complete. Before we start, If you haven’t seen this article, it is perhaps prudent to go now and complete the checklist as this will inform you for this second step. Click Here

The second step has two sub-steps that are critical.
1. From those areas you have identified in the checklist as requiring work which are the most important to work on.
2. Once you have nailed down your priority area, explore the reason why this may be, to provide you with a focus on what it is you must work on.


Prioritise your discipline areas
One of the challenges we often face is that if there are several different areas to work on in our development (both in and out of trading), then this can seem very “big” and sometimes overwhelming. For new or inexperienced traders this feeling of overwhelm may often be a barrier to take any action.

So, it seems logical to focus on one issue at a time to make things seem more manageable and achievable. Additionally, and looking forward to later steps, one of the other benefits of this approach is that success in one area will often provide a confidence and the motivation to tackle other areas.

In terms of what we should choose, with the list of areas you will have already identified, there will be some which may potentially have a more easily defined impact than others. An example of this may be that, if you have a trading plan and yet you are consistently failing in executing exits as you should, this would have a major impact on results.

So, to the practical aspect once again, with your list, allocate a score between 1-5 re. potential impact you think addressing this area of ill-discipline may have on your results. This should help you choose the “one”.


Identifying the cause.
Potential causes of ill-discipline, although sometimes dependent on the situation, can be many.
Here are some of the most common causes (you can get clues from what your internal voice is telling you).


1. A choice that trading is not of enough importance to invest the time/effort needed. (So, “I haven’t got the time”)
We all allocate time to trading activities. Such time may be effectively invested in things that could make a difference or otherwise. Additionally, although we are not suggesting that trading should take over your life, there is a need to ringfence some time (rather than watching reruns of “Law and Order’ to put some hard yards in at the front end to have the right things in place).
So, you have two choices to make.
a. Do I choose to ensure I have ringfenced the time to do the things I need to become a “committed” trader?
b. Do I choose to ensure that the time I do allocate to trading activities is invested in the right things, e.g. Recording my trades in a trading journal or unfocussed skipping between “interesting” news, or often useless trading forum chatter?


2. Don’t know what to do (or perhaps, “it’s too hard”)
OK, so there may be a ‘knowledge gap’ in terms of the “how-to” make something happen. For example, you may believe that there is merit in making your trading plan statements specific enough to facilitate consistency and measurement, but you are not quite sure where to start.

Two key points here…

Firstly, as with any part of your trading development planning, you need to refine the question you are asking, then seek out appropriate resources and of course finally to follow through on asking for what you need. GO Markets has platform support and educational support to help you on your journey. Perhaps you are not asking as you feel you should already know the answer or maybe even that you think your question may be “stupid”. Remember there is no such thing as a stupid question, and surely it is far less wise not to ask if the support is there.

Secondly, sometimes when faced with multiple issues to resolve it may seem overwhelming or perhaps taking on new knowledge is something that does not come easy. Think about your journey so far. I am sure there are things which you didn’t know at one stage that now come easy. Why shouldn’t additional learning be the same?
Quite simply, you must step up to the plate and find the answers you need.


3. You have not been specific about what you should do and when you should do it
Ambiguity in a trading plan or system is one of the potentially most damaging issues on an on-going basis. We frequently extol the virtues of having enough specificity in all your trading plan statement to facilitate consistency in action and the ability to measure your trading actions accurately and meaningfully (so as to make adjustments if needed).

To remain in a state of uncertainty in action as you have not got sufficient and specific individual guidelines to use in the “heat of the action”, clearly does not serve you well from a discipline perspective.

Additionally, it may be that your trading plan is incomplete. Perhaps it does not cover all market scenarios or may have enough detail regarding trade entry but lacks the same rigor relating to exits.

The solution here is obvious. Work need to be put in to make your trading plan as robust and specific as it needs to be. We have written a previous article on this, so if this resonates with you then perhaps this would help (Insert link).


4. Don’t believe something/you will make a significant difference e.g. your existing system, a new system, a new piece of learning.

Clearly if you have little faith that a particular action, be it part of your trading plan or the need to implement a system such as journaling, is going to make a difference to your trading results, then you are far less likely to action. Adult learning theory is full of references to the need for relevance before learning action is taken and of course much of this is based on having some evidence that something will make a difference.

Here is the problem, without evidence of at least some tangible difference you are less likely to act and yet without action you are not going to create the evidence you be sufficiently motivated to do something.
We are going to discuss gathering evidence in detail in other articles within this series but for now it is probably sufficient to say, that if the only way to create the evidence that something will work for you then surely it is worth even dipping your toe in the water to find out a little. This may be enough to give you the will to subsequently try something out for longer.


5. In-built trading ‘heuristics’ (cognitive biases) or a belief that the market is “wrong”.
Our final point of the common fives is some of the in-built “wiring” you may have. People who come to trading have an inbuilt set of belief and value systems that develop through their lives through instruction from others and experience.

These inbuilt systems are termed cognitive biases, and in many instances in the ‘heat of the action’ take over from your written and planned ‘trading system’, even if you strongly believe that your system is good, influence on your behaviour in the market.
Results that you may produce from your trading can reinforce these inbuilt biases making them more acute, and so have more and more influence on what you may do when in the market, until finally they end up destroying the capital and so confidence of the investor.

There are many such biases documented in an area of study termed behavioural finance. Six of these seem to be commonly described namely:

• Loss aversion bias,
• Recency bias,
• Outcome bias,
• Sunk cost effect,
• Minimalisation, &
• Disposition bias.

We will explore these in detail in future articles, but these may be a contributory root cause particularly of execution discipline with direct trading action.


So, with our five root causes covered, onto your missions for this second step (key question…Are you going to push through an exercise the discipline to follow through?):

  • Consider the potential causes (listen to your internal voice) and begin to identify what cause(s) may be relevant for you.
  • Make notes on anything you identify to get more detail “inked” on paper.
  • Watch out for the next article in this series where we will explore starting to gather enough evidence to change potentially ill-disciplined behaviour into actions which may serve you well.

Disclaimer: Articles are from GO Markets analysts and contributors and are based on their independent analysis or personal experiences. Views, opinions or trading styles expressed are their own, and should not be taken as either representative of or shared by GO Markets. Advice, if any, is of a ‘general’ nature and not based on your personal objectives, financial situation or needs. Consider how appropriate the advice, if any, is to your objectives, financial situation and needs, before acting on the advice. If the advice relates to acquiring a particular financial product, you should obtain and consider the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) for that product before making any decisions.