I have often written that the reason that trading can be so lucrative is that it is very difficult. You have to work very hard to produce substantial trading returns over a long period of time, and you will have many frustrations and setbacks along the way. However, if you slog away day after day, then the great likelihood is that you will be well rewarded.
There are several things that make trading difficult. The irrationality and unpredictability of the market will confound us at times, and there is also a lot of good and bad luck involved in trading, no matter how skilled you might be. That is just the nature of the market.
The biggest obstacle for traders is internal. We have to constantly relearn what we already know. We know what we shouldn't do, but we end up doing it anyway. Instead of taking the necessary action, we sit and do nothing. This happens over and over. We shake our heads in disgust at our behavior and vow not to do it again, but of course, we do.
Knowing what we should do and actually doing it are two very different things. It is even harder in an endeavor like trading when conditions are constantly changing and no two situations are exactly alike.
You are going to be undisciplined and break your trading rules quite often, but the problem is that you will be reluctant to admit it. You will likely look for justifications for why you did what you did. You may blame other people for the issue or just bury your head in the sand and ignore it.
Rigorous discipline is extremely hard, but if it is applied consistently over a very long period of time, then positive results are a near certainty.
How Do We Stay Disciplined?
1. Have very clear rules. Many traders avoid the problem of discipline by never establishing clear rules in the first place. Rules need not be highly detailed. They can be general principles such as not letting drawdowns exceed a certain level or not buying stocks at lows, but you have to have some clear principles to guide your trading, and it is important to make them precise.
2. Review those rules regularly and pound them into your thinking. They should become part of your methodology to such a degree that you apply them automatically without much thought. Your stop-loss levels are here and there, and they don't change.
3. When you break a rule or are undisciplined, then acknowledge that fact as quickly as possible. Review your trading on a daily basis and ask yourself if you are staying disciplined. The easiest and most costly mistake that traders make is to simply ignore a stock that is not acting right because we are too lazy to discipline ourselves. We often feel that it is too late to take action and that allows inertia to set in.
4. Start fresh. You have the ability to start fresh at any time. Pretend that you just bought each stock you own that day and then apply your trading rules as if that is your cost basis. Forget what happened in the past and focus on the correct discipline going forward.
Traders are always looking for new trading approaches and ideas. That is a fun and exciting part of trading but staying disciplined and following our own rules is what will determine the ultimate results more than anything else. Once you figure out what to do, the hard part is actually doing it.