One of the greatest traders of all time is Stanley Druckenmiller. Druckenmiller was working with George Soros in March 2000, when he bought $6 billion in technology stocks and, within six weeks, lost $3 billion and left his position with the Soros firm.
When Druckenmiller was asked what he learned from this giant loss, his response was: “I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again. But I already knew that.”
While the size of the loss that Druckenmiller suffered is certainly notable, the fact that he was undisciplined and did something that he knew he shouldn’t is behavior that every active trader struggles with.
Most traders are very aware of what they should do – such as cutting losses aggressively- but they simply fail to do it in many situations. All the large losses I have suffered in my trading career were due, in large part, to a lack of disciple rather than a lack of knowledge.
Good traders and investors spend a substantial amount of time developing trading and investing methodologies and looking for great stocks. They know all the secrets and tactics and rules, but then they fail to stay disciplined when applying them, and it costs them big. We just don’t do what we know we should do and when we are in a market like the current one, that can be extremely costly.
In recent years computerized trading has become a large part of the market. These computers aren’t any smarter than the humans that program them but what they do far better than humans is discipline. They follow the rules and don’t deviate from them unless it is programmed into their methodology. Human traders always seem to be looking for ways to deviate from their plans and will find a million justifications for why they should relax their discipline. In many cases, trades are just tired and lazy and do nothing even when they know that is the wrong move.
In trading, any rulebook is better than no rulebook. Any system that requires you to act to cut losses and harvest gains at some point is better than no discipline. Astrology will work just fine if you apply it consistently and stay disciplined.
Unfortunately, there is no easy way to develop discipline. It requires constant effort. The best way to develop more discipline is mindfulness. You have to constantly remind yourself of its importance, be very aware of it and cultivate it in numerous ways.
Every time you buy a stock, you must force yourself to have a clear plan. The easiest way to be undisciplined is to not have a clear plan of action. If you never make a plan, then it is easy to pretend that you are still disciplined and hope that things work out.
Most traders need to spend more time cultivating discipline rather than trying to find better trading methods or stocks.
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