Each morning, I write a 420-word memo because writing is one of the best way to focus your thinking & effect some change you desire. It is a physicalized version of what is going on inside your mental environment.
Today’s memo is the first of a three-part article on Trading Psychology.
Trading, as a Mental Discipline [source: Mark Douglas]
Trading is a mental discipline, a process of learning how to take conscious control of your actions with regard to using a system, following a list of rules, and placing orders.
Without discipline, you will be at the mercy of your own unrestrained impulses & out of control.
You are no different from any other market participant, in that you do not relate to a fair price or value; you relate to comfort. What gives you comfort is doing what others are doing. Thus, in order to hold nonconsensus views regarding value, you must learn to relate to your own process, your own confidence, and your own ideas.
Disciplined trading requires 1) studying, analyzing & back-testing an asset using various indicators & time frames to develop a system for getting in and out of the market, 2) trusting & following your system at all times, never trying to outguess it based on hunches or news, and 3) continuously making uncommitted assessments of probabilities, also known as distinctions, rather than making judgements or reacting & jumping to conclusions.
Technical analysis is a math-based method for identifying & anticipating trends & price movements, so you must take every signal your system generates. Technical traders use indicators, which measures of price and volume, to help them anticipate price movements to make gains. Using data-based rules, you don’t concern yourself with anticipating the group’s reaction to certain kinds of news or information. The group’s feelings, thoughts, and reactions are already made available to you in the chart.
As you follow your trading system in one case after the next, you may or may not make any money; you may lose money. What you gain by following your system is confidence. You learn to confront outcomes with acceptance, and confidence develops. As your confidence levels increase, and you experience a crucial decrease in confusion, anxiety and fear.
Proper execution means identifying significant reference points for the asset, placing orders on either side of that point, and waiting for the market to do whatever it is going to do; let the market make you right. Every trade you execute is done according to pre-determined rules. Every trade is recorded in an Excel file, with a detailed entry containing all the relevant information.
This is only half the battle. Developing your perception & execution abilities enable you to make money, not hold on to it. Disciplined traders must also undergo continuous psychological repair in their daily lives in order to develop their ability to accumulate long-term wealth.