BECOMING A DISCIPLINED INVESTOR
“A key to self management is the capacity for self-observation, it is not the same as overcriticism
... it is rather a consistent monitoring of one’s performance from a perspective
significantly detached to allow accurate evaluation.” --A. Garfield
It is clear that knowledge of oneself is just as important in trading as knowing facts,
economic theories, news or trading methods. In the trading world, often emotion reigns
supreme, facts are ignored and there is no wrong or right. The person who has control of
himself due to his discipline and emotional self-control will ultimately emerge from the
battlefield a winner.
However, coming to terms with our strengths, weaknesses and personal traits is not easy. It is
not easy to analyse yourself objectively because you will naturally have a subjective
When trying to understand yourself, you must be willing to be totally honest with yourself.
This can be difficult and painful. The person must have the ability to accept the results of
looking within. Most people, however, find it difficult to admit they made a mistake. Ask a
room full of people how many of them are happy admitting their mistakes and you will see
few, if any, hands go up. Admitting mistakes, however, is a positive not negative attribute in
trading, as it is in life. The world is full of people who want to be right, but the reality is
everyone cannot be right all of the time.
“Learning is after all not whether we lose the game, but how we lose and how we have
changed because of it, and what we take away from it that we never had before to apply to
other situations’ losing in a curious way is wining.” --Richard Bach
All of us have physical and mental disabilities, which prevent us from achieving all our goals
and desires. No one is perfect. It is possible, however, to isolate and work on weaknesses.
This is similar to reviewing and working on your trading method. You must understand the
strengths and weaknesses of the system and try to improve it, but realise perfection is
impossible. Remember, in the final analysis you have inherent weaknesses and may not have
all the required attributes for trading, but neither does anyone else. The more traits you
possess, the greater your advantage, but the more you work at obtaining these traits, the better
your chances for success.
THE SECRET OF MARKET SUCCESS
“For surely we are not ... no simply contending in order that my view or that yours may
prevail, but I presume that we ought both of us to be fighting for the truth.” --Socrates
The aim of any investor is to make money by correctly identifying and acting upon the truth.
The truth, however, is elusive, as there is no scientific method to get us to the truth. The truth
is difficult to see as it can be totally different to what your emotions and natural instincts are
telling you. Furthermore, the fact that the majority of people agree or disagree with you has
no relevance in the pursuit of the truth.
To succeed in trading you need to understand that there are no certainties, only probabilities,
and to seek the truth you need to have a deep understanding of yourself and the market you
operate in, and how you relate to it. You need to stand-alone and, from your perception of
what is going on around you, decide what the truth is.
I started this essay with a quote from Lao Tzu, who founded the Chinese philosophy of
Taoism over 2,500 years ago. Many of the beliefs of Taoism are relevant to trading.
Trading is a reflection of life. This is why there are so many contradictory ideas and shades
of grey instead of black and white answers. Just like life, trading is unpredictable; people who
believe that there is a scientific law to investing that can predict commodity price movements
are missing the point. Trying to reduce everything to numbers if, in Lao Tzu’s words, like
trying to catch running water in a bucket.
Many elements of Taoism hint at the psychological course of events. This is particularly
relevant in trading. Tao in English means “the way”. Tao is the missing link in trading, it is
effectively the ability to see an event before it is definitely known, that is the key. It is really
the intuitive ability to see and then to act.
In the world of Taoism you need the ability to use both analytical and intuitive skills. Relying
on both right and left hemispheres of the brain to process and analyse information, this is the
key to identifying and acting upon the truth. Once you have brought your thoughts to bear on
the facts of a situation, then you need to let go. This is the incubation stage where you are
letting your thoughts go where they may, without the influence of anyone else. When you
learn to think and act in this manner, you will be surprised how you see many situations the
crowd will never see.
Investors spend millions each year on “Holy Grail” trading methods, books and tapes that
they believe will give them regular and consistent profits from the market, with low
drawdowns. These people will never make money; in trading there are no certainties, only
probabilities, and a trader must accept this if he is to make money.
A scorpion wants to cross a river, but he can’t swim. He asks a frog, who can, if he can hitch
a ride on the frog’s back. “You’ll sting me,” says the frog. “It would not be in my interest to
sting you,” says the scorpion, “because then I would drown.”
The frog thinks about the scorpion’s logic, finds it impeccable, agrees to take the scorpion on
his back, and then braves the waters. Halfway across the river, the frog reels a burning spear
in his side; the scorpion has stung him after all. As they sink beneath the waves, the frog cries
out, “Why did you sting me Mr Scorpion, for now we both will die?”
“I can’t help it,” replies the scorpion, it’s in my nature.” --(From the movie “The Crying Game” 1992)
We are all human, and we all have emotions that are inherent in our biological make-up, we
can’t rid ourselves of them. What we can do is understand them, and try to control them. If
we don’t, our trading will be doomed to failure.
Obviously there is limited space in this essay to cover all the psychological aspects of
trading. I would, therefore, strongly recommend you consult the enclosed reading list for
1. The Disciplined Trader by Mark Douglas
2. The New Investors Quotient by Jacob Bernstein
These books cover all aspects of psychological problems encountered in trading and give
clear guidance on how to avoid the emotional traps that destroy most traders’ equity. These
two books complement each other, and are essential reading.