Discipline in Trading – What Matters In An Environment Of Uncertainty Such As The Stock Market

“We trade what we are” an older trader once told me years ago and hit the nail on the head with that.

Probably the most incisive and important insight for my career in stock exchange trading was the insight that the decision about profit or loss is not primarily based on understanding the rules for entering and exiting a position, but mainly on our emotional attitude towards the business. I go so far as to say that even the most accurate entry and exit rules are worth nothing if they are used by an emotionally hounded trader.

This insight is nothing new and certainly nothing revolutionary: you have read it many times, you have been told it many times.

And yet it is something drastic when this insight comes about over time with brute force and the “aha” effect occurs. You too will not be able to escape this cognition effect, sooner or later it will catch up with you, because this fact also applies to you.

In the following I would like to outline the three most important cornerstones within which the understanding of the above statement is to be found:

We are operating in an environment that is highly uncertain.

I am often asked whether I have read the opinion of analyst A or B and what I think of it. Usually I have to deny – I read almost no other market assessments, because I do not exclude for myself as a person / trader that I could be influenced by other opinions and that is exactly what I want to exclude (or at least minimize). Consequently, I try to read only what I consider to be sufficiently well-founded, logically derived and understandable, so that I do not see any negative influence on my opinions and assessments.

There is a technical analyst I like to read from time to time, simply because his way of formulating and the way of building up and presenting his thoughts gives me reading pleasure. He also has a way of approaching the markets that I like and that is similar to the way I work. In no case do I read articles by market observers who like to refer to the viewpoint: “The market will do this and that now and it will definitely not do that. I disagree: “The market doesn’t have to do anything and anything can happen.”

An analysis is an idea, a scenario. A good analysis is one that describes the current state of the market and uses previous analogies to create scenarios for possible future price movements. At best, such a scenario discussion allows the determination of a previous probability of occurrence; in any case, it should always be explained from when we can assume a false scenario. If these points are fulfilled, an analysis is complete for my understanding and does not allow any discussion about the quality of the analyst at the end of the day. If these points are missing, then an analysis is not helpful, but rather hindering or confusing.

The prices on the stock exchange are made by people, so they are not subject to those laws of nature that make a weather forecast possible. They are not subject to physical laws, which can be explained with corresponding formula rules and they are not subject to rules of the game, with which they would be programmable like chess computers.

Course developments are the expression of a highly emotional reflection of human thinking, of interpretations and expectations, hopes and reactions. And thus course developments are always marked by enormous uncertainties.

We can only counter these uncertainties by creating and handling sets of rules
Based on our own market assessment/scenario consideration or that of a third party, which meets OUR criteria of a really valuable market assessment/scenario discussion, we apply a trading rulebook. This must be clearly defined in its minimum requirements:

  1. when, how and where I get on board,
  2. when, how and where I get out in the best case scenario,
  3. when, how and where do I get out in case of a deviating share price development.

In a further developed version, our rules and regulations should allow for additional aspects, which take into account additional information from the market (Are there final orders? How does the supply and demand situation in the order book develop? Are there any market-moving news?), whereby there must be no reduction in the former minimum requirements (one to three)!

We are solely responsible for what we do in the market!

During my training as a trader, the question was once asked in which aspect a beginner differs from a professional. Many points were named, but these were all more or less wiped aside by the training trader. In the end, one distinguishing feature remained:

“A beginner looks for the blame for a failure on a third party, whereas a professional sees trading as a business for which he bears sole responsibility from start to finish”.

Now we come to the consequences:

If we are the only ones who are responsible for what we do in the market, if we are the only ones who may get in the way of the market and prevent profits, but allow losses to grow, we must draw the consequences and enforce them in every respect, which in turn requires the highest degree of discipline. In the following, I will list the points that I personally consider to be relevant for me and where I can argue for marking them out as fixed cornerstones as a guideline for working in the market:

A daily market assessment / market evaluation is absolutely necessary. It is not wrong or inhibiting to also obtain the opinions of a third party, but their assessment should meet the following aspects:

  1. its statements on market diagnosis should be logical and comprehensible
  2. his diagnosis of price developments should be followed by a discussion of scenarios. (I personally make sure that terms such as “the market will do this and that”, “in any case we will see this and that”, “now the market can only do this and that” are missing. Otherwise, I personally consider this analyst to be inexperienced or dubious).
  3. every scenario discussion should include an exit scenario. There is no shame at all in being wrong with your expectations. We know that the market is highly uncertain and NO one in this world knows how prices will develop in the future. All we want is a probabilistic scenario with a plausible exit scenario.
  4. I personally recommend that you do not burden yourself with a lot of market assessments. It won’t help you at all to study a lot of comments and analyses that may reflect different assessments. The whole thing will not lead to more than a high degree of uncertainty, but will leave you rather helpless. Choose your information environment in advance by carefully checking the contents and sources, because you owe the analyst nothing and yourself everything!
  • Based on our market evaluation / market assessment, we develop an expectation for the day and check whether a meaningful, further-reaching positioning can be established (core position or system-based trade).
  • For pure intraday trading we use one set of rules or two sets of rules with which we gain experience or ideally have already gained experience.
    It has already been said elsewhere, but I would like to repeat it again: Day trading, if you completely free it from its superlatives and demystify it, is nothing more than stubbornly collecting points in a market which you graze every day, every week, every year. And here we do not jump from method to method, not from rulebook to rulebook, but adhere strictly to one and the same method, provided that it has proved successful. In the end, what counts is not what techniques you know, in the end what counts is what you have collected, day after day, with minimal risk.
  • We condition ourselves to consider trading as a business, free of any personal ties to us.
    I know this sounds easier than it is, but I have learned that it is this distance that increases the possibility of steady returns. If you go into trading with your heart pounding, if your hands get sweaty when you are positioned, you block yourself and inevitably make mistakes. We must learn to count profits and losses in points, not money. We have to learn to see losses as costs and consequently force ourselves to build in cost brakes (loss limits) and to keep to them. We have to understand that the market is never directed against us personally, but will turn mistakes to our disadvantage in every respect. We learn not to let any actionism arise.
    If your set of rules shows no need for action, then there is no need for action. And we show humility in the market: if we have reached our daily goal, we stop or close the trade immediately after the first error that follows. Always see the market as an ally that, at least in theory, opens up all possibilities. Today, everyone has almost the same opportunities to make money in this market, whether you are a professional in an institution or you are at home. Technology no longer makes the difference, the difference is your knowledge, your ability and experience and your discipline to keep your emotions small.

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