22. The Flexible and Disciplined Trader

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Module 12. Innerworth – Mind over markets

Flexibility and discipline go hand and hand. In their book, “Electronic Day Traders’ Secrets,” Friedfertig, West, and Burton argue, “Discipline is saying ‘I’m wrong. I’m getting out of the stock and actually doing it. Sometimes you’ll be long on a stock and all of a sudden it’s falling. Undisciplined people get stubborn and say, ‘It’s going to go up’ or ‘It’s going down, I’ll buy more and eventually it will go back up.’ The discipline to admit when you are wrong, get out, and not take a big loss is what makes a great trader.”Winning traders are flexible. They look at a trade from different angles and they are not afraid to explore every possibility. They know they may be wrong, but being wrong doesn’t bother them. Indeed, they often expect to be wrong. The willingness to admit you are wrong gives you power and freedom. When you are willing to admit you are wrong, you won’t be defensive. You’ll feel relaxed and will effortlessly close out a position when you need to. You won’t fruitlessly hold on to a losing position and hope that it will turn around. You won’t let your emotions of fear and greed take you on a roller coaster ride of emotions as your accounts balance dramatically rises and falls.

Fear is a trader’s worst enemy. When you are afraid, you become rigid, and rigidity is related to undisciplined trading. The fear response is usually adaptive. When we perceive we are about to experience harm, it’s vital for survival that we mobilize our resources and focus all our energy on the opponent that threatens us, and fight if we can win or run away if we can’t possibly win. In the wild, working on instinct can be adaptive, but traders must be more flexible and open to possibilities.

When we become fearful during a trade, we are often stuck and paralyzed. When we unconsciously perceive our trading plan is amiss, we instinctively focus our attention on the harmful agent and become fixed on it. Rather than scanning and considering a variety of options, we restrict our attention, and erroneously consider one option at a time, which usually is selling a winner prematurely or holding onto a losing trade too long.

Fear can also play a role as we devise a trading plan. The rigid trader may secretly fear that his or her plan is unlikely to succeed. Rather than carefully consider all possible adverse conditions, the fearful and rigid trader focuses on only one possibility and develops no alternative plan of attack should an unwanted or unanticipated event thwart his or her trading plan. For example, one may anticipate a stock rising during the following week, yet secretly doubt whether the move will pan out.

Out of fear, the rigid trader may be afraid to consider and account for possible adverse events, such as earnings reports, a possible interest rate hike, or a sudden change in general market sentiment. The flexible trader, in contrast, has no fear of looking at all these possibilities and determining which are likely. Openness to all possibilities allows the flexible trader to change his or her plans if required, and recover quickly from a potential setback.

When you are flexible, you’ll trade more effortlessly. You’ll stay objective and be able to astutely read the markets more accurately. And in the long run, you will trade more profitably.

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Courtsey To: Zerodha