Discipline Exercise made the difference

In all the books you read and all the advice you get from Traders, the number 1 thing you hear is, Be Disciplined. What does that really mean, and if you're not disciplined, how do you become disciplined. I have found being disciplined as a trader is very different than being disciplined at work, the gym or other things in life.

Discipline and focus is what makes you a good trader, but how do you get there?

I have spent the last 2 years learning technical analysis, swing trading and after the market crashed last year, learning to day trade. I was no longer willing to take a trade over night after the crash. Now I'm focused only on day trading and trying to develop a system that works. My biggest obstacle is I am not being focused and disciplined to my system. The system works fine, as long as I remain in control of impulsiveness to make trades that my system does not call for.

In October of 2008 I was day trading SPY and DIA and a few stocks. I typically made about 10 to 20 trades a day and usually had losing days or small winning days of $ 20 or $ 30. Losing days were in the 100s occasionally getting into disastrous losses of $1000 in 1 day. The worse the day went, the more I would raise my position size. This always resulted in bigger losses. This had to stop. It was driving me crazy.

I kept thinking, if nobody knows about these losses, I'll make the money back quickly and it will be like it never happened.

What I did do?
I started sending my results each day for review to Kerry, no matter what those results were.
For a time I would send a screen capture of my TradeStation screen to prove I didn’t trade for the day if there were no trades.
I had to make myself accountable to someone, otherwise I would cheat and who would know?

Each day Kerry would send me a critique of my day. He would review positive points of the day and what needed improvement. During this time I had a few days of high trade count and big losses. The advice on how to handle bad days was a key turning point. This helped to not throw you off your plan for the next trading day. Each day I would consider the previous day’s advice, and little by little, my results started to improve. I started to understand what discipline is for a trader and why it works.

Today I am much more relaxed as I trade, I focus only on making good entries and managing a trade well once I'm in. I keep my position size small and concentrate on making good trades, not making money. I make a few trades a day, at most about 6 trades. For the month of March I have traded 13 days and 11 were profitable. I have become more confident about what I will and will not do, and it improves my decision making thru out the day.

We hear all the advice and little catch phrases about how to become a good trader, but I say, you have to live it to really know what it is to be a disciplined trader. Once you are there, you will understand and it will be the only way you will ever want to trade. Working this closely with Kerry has been a turning point for me.

Thanks!
Tim H

Cutting Losses

Losses must always be cut and they must be cut quickly, long before they become of any financial consequence. After the elimination, the transaction must be, in a sense, forgotten. It must be left out of future consideration completely that there is no sentimental bar to reinstating the position at a higher level, either very soon or at a later date. Cutting losses is the one rule that can be taught with assurance that is always the correct thing to do. However, as a matter of actual application, it requires a completeness of detachment from human frailties which is very rarely achieved. People like to take profits and don’t like taking losses. They also hate to repurchase something at a price higher than they sold it. Human likes and dislikes will wreck any investment program. Only logic, reason, information and experience can be listened to if failure is to be avoided.

An excerpt for the book…

The Battle from Investment Survival

By: Gerald Loeb

Traders Corner

Kerry,

As this seems to be "Equity Curve Week" I thought mine may also give some encouragement. The interesting point is that it was back in August that I decided I needed to review what I was doing and seek some guidance from you. You can hopefuly see the results since then (and it has been a tough time in the markets over this period too of course). The percentage gain is relatively small but that is purely because my work is keeping me very busy and so I have been trading very lightly and so have missed numerous signals.

Trading is now nowhere near as stressful as it used to be. I know exactly the game that I am playing even if I don't play it as well as I could.

One interesting point is that the trades I have been making since August have been almost identical to those I made before. The difference is that my entries are now well defined rather than me just blindly buying the market. Trading really is a typical case of where a chain is only as strong as the weakest link. In my case the weak link was my entries.

Still a long way to go of course but the direction is the right one now.

Regards,

Chris

Traders Corner

I love getting feedback from clients and fellow traders. Here is another email I just received today. Jeff is wonderful guy and a good friend, not to mention a good stock picker. I always pay attention when Jeff mentions a stock. Here shared an email this morning and I asked him to elaborate on the difference in his trading, here is his reply and many thanks for letting me post to the blog.

Hi Kerry,

Here is my equity curve for January. My picks have gotten better, but I have also been more consistent at taking profits. You’ve played a big role in these results. Thanks!

These are the main reasons for my results ( December was also good and I was profitable for 2008 ).

1) I spent much more time on a short list of about 10 favorite stocks and really got to know how they trade and what is and is not out of character.

2) I focus much more on support and resistance on all time frames. I tend to sell as we approach resistance and if we keep going, I don’t worry about it. I’ve always had a tendency to kick myself if I get out too early or if I don’t get out and it drops! That leaves a narrow margin where I’m not kicking myself. Now I’m focusing more on my account goals rather than “being right.”

3) I also like to buy closer to support so my stops can be below that support. I’m also using volume much more to determine if the short term trend is running out of or gaining steam.

4) I am trading smaller with proportionally wider stops so I don’t have to be as precise in my timing.

5) Probably the biggest thing is that I’ve really cut back on questioning myself. There have been many times where my analysis suggested I enter a position but I would talk myself out of it. The same applies to exits. I would see a stock hit a ceiling and stop going up and I was afraid I would sell and be wrong. Now I sell and if it goes up further, no big deal.

Jeff

Equity curve minus impulsive trades

In working with a client today we reviewed the recent equity curve. In doing so we indentified those trades that was not traded based on an indentified strategy. I suggested that he take his equity curve and remove any trades that were impulsive and re-plot the equity curve, keeping only those trades that were made based on an indentified set of rules. Here are the results and his comments. Hi Kerry, I've omitted some of the trades that we determined as impulsive or no strategy trades... Attached is the result.. I've printed it out and it is hanging on my wall now, to remind me what is possible and what can happen if I impulsive trade again. Wessel