If you consider yourself to be a discretionary trader, even with ‘rules’, what does that really mean?

 

The definition of discretion is the ability, the power, or the right to decide or act according to one’s judgment.

 

Yes, we have to make decisions – use our judgment – to enter and to exit the market. Can you let yourself follow rules or a plan that tells you exactly when to enter and exit? If you do have such a plan or rules in place, how often do veer from them? Most traders veer pretty often.

 

There is a great irony I see from my vantage point as both a trader and a coach working with traders: Although trading involves pattern analysis and numbers and many people attracted to trading are often very analytical, the actual moment of truth in trading – deciding to enter or exit – has very little to do with numbers or market analysis.  

 

Discretionary trading involves judgment, and our judgment is highly influenced by our beliefs about ourselves and our deepest (subconscious) fears and hopes. This is why most traders repeat the same mistakes despite all the promises to do better next time, despite the big post-it note on your monitor.

 

Yes, we look at the numbers and the patterns and we think we are making a decision based on that stuff, but in the heat of the moment what becomes more important is the desire to be right, or the desire to not be wrong. 

 

The numbers and the patterns are typically somewhat ambiguous anyways; we all know there’s no certainty in trading. If you are a discretionary trader who says, “its just all about the probabilities”, you are sorely mistaken.  For a discretionary trader it’s really about how you react to uncertainty, what goes into your judgment process when facing the uncertainty of those probabilities in the heat of the moment.

 

It’s not about strengthening your willpower. Will power is a finite resource and subject to fatigue, easily influenced by the body’s glucose levels. And, ironically an intense focus on willpower also competes with your ability to think analytically!  Humans have a cognitive load limit.

 

The great irony that I see all the time in both my own trading and in working with other traders is that the skill most needed for a discretionary trader is self-awareness. Expanding self-awareness means taking what was once subconscious and making it something you are consciously aware of.

 

Deep self-awareness goes beyond knowing what you’re thinking and feeling; it also involves awareness of the subconscious motivations underlying your behaviors. 

 

Often, problems for a trader will persist, even if they’ve tried the willpower approach, or they re-wrote their rules and their plan  –  they still take impulse trades, still hold losers too long, still exit winning trades much too soon. Why?

 

The power of the subconscious – that’s where our deepest fears exist. Yes, we are consciously aware of our fear of losing, our fear of being wrong, etc, but on a deeper subconscious level these fears usually represent something more significant to us – it’s those deeper fears that become the subconscious motivations underlying our actions. It usually has something to do with the fear of not being good enough in some way.

 

Regardless of whatever list of rules we have, working towards understanding what influences our judgment in the heat of the moment is the most powerful way to stop making the same mistakes over and over again.