The consequences of trade misconduct

Violation of discipline in trading: reason or consequence?

Usually, traders connect losing money in the market with a lack of discipline. However, not many people try to analyze the reasons which provoke insufficiency of consistency in making trading decisions. In fact, absence of discipline is just a consequence rather than reason. In the present article, we will try to analyze the main factors which provoke violation or disregard of trading rules by traders.

The mood, needs and psychological state of a trader at the current moment, as a rule, seriously influence realization of goals in the long-term perspective. Many traders try to get short-term satisfaction (not wishing to experience temporary discomfort) sacrificing a long-term reward.

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So, here are 10 main reasons why traders manifest a lack of discipline:

  1. External distractive factors and boredom result in the lack of concentration. Every trader has his or her own limit of concentration, which comes in a certain moment of time. It is especially topical when the market is inactive. It is very easy to lose concentration during such periods.
  2. Mental strain results in the loss of concentration. A necessity to stay in front of the computer monitor all the time often leads to deconcentration of attention. Pilots, car drivers and soldiers know this state well.
  3. Excessive self-confidence after a profitable period. Usually traders connect a series of successful trades with their knowledge and skills and attribute unsuccessful periods to external situational factors. As a result, a series of even accidental wins may lead to excessive self-confidence and deviations from the trading plan. This is often observed during the periods when a trader trades too often and/or executes relatively big trades.
  4. Unwillingness to accept losses. Such an attitude to risk results in a situation that after a drawdown on their trading accounts traders change rules of their trading systems on the run, converting short-term trades into long-term ones and small volume trades into big trades by means of replenishments to the loss-making trades.
  5. Absence of confidence in the trading strategy since it hasn’t been properly tested on the historical data and in real time. It is difficult to bear even acceptable drawdowns if you do not have confidence in the methods you use. A positive internal dialogue or correct psychology are insufficient for becoming confident in your trading in the market. It is necessary to substantially test your trading method (on historical data and in real time) in order to make sure it is really efficient.
  6. Personal qualities, which lead to impulsiveness and tolerance to stress. According to psychological studies, there is a category of people who are inclined to make impulsive decisions and who are not responsible by their nature with respect to realization of their plans and intentions. These personal qualities are often accompanied with a drive for high risk and sharp feelings.
  7. Situational factors that influence efficiency. They could include a drawdown of the trading deposit and increase of personal spendings during trading. Susceptibility to the influence of these factors distorts adequate perception of the market. There are traders who care more for their P&L rather than quality of trades. It is difficult for such traders to keep a clear head during trading.
  8. Too big (with respect to the trading account) positions. It is a very frequent situation. Big fluctuations of the trading account usually lead to emotional reactions which interfere with a calm and reasonable behaviour of a trader. Trading without a clear trading plan/strategy. It is interesting that many traders consider themselves systemic traders but, at the same time, they do not have a clear and easy-to-understand set of trading rules. It is difficult to stay disciplined and conduct assessment of the trading activity if you do not have a clearly expressed plan.
  9. Time-frames, trading style and traded markets, which do not correspond with your talents, skills, risk tolerance and your personality. Traders deviate from their trading plans too often because those restrictions that they place on themselves are absolutely unnatural for them. And their deviations from the disciplined behaviour are, in fact, unconscious efforts to trade in the style, which is in a better correspondence with the trader’s skills and talents.

As you can see, the above listed reasons point to the fact that not all the problems with discipline result from the trader psychology. In many cases, a lack of discipline could be a result of absence of a proper preparation for trading or incorrespondence of the trading style with the trader’s personality.

Dear friends, share your thoughts in the comments if you know other reasons, which are not available in our list, or if you do not agree with us. We will be very grateful if you share your experience and ideas on this subject!

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