Tuesday, January 12, 2010

Bit more on discipline

Why discipline in following system is so important for system traders?

Often we read that discipline is the most important characteristic of system trader.

Why is so?

I will give specific example from the system that I follow: It is based on 30 min ALSI chart following Dow Theory. If we go through system’s performance log we will see that in period from 13. January - 03. February 2009 system made 3831 points and from 18. November to 4. December it made 2382 points. So, in about 30 trading days out of 240 days in a year system made 6213 points or in 12% of all trading days system made about 32% of yearly profit. Let’s imagine now that one was not in the system during that period of time. Simply, your profit for the year would be much smaller and on top of that all other metrics for the system would be worse, including average winner/average loser, % of winners, T and F formula, etc.

What I learned from more than 6 years of trading is that points in trend following systems are coming in bursts. So, system will make good profits then it will return portion of profits or will tread water for some time. This is where trading becomes difficult and that is when most of the traders fail to follow system.

Frequently occurring pattern is that trader will not trade good patch and after missing good results system trader will start trading bad patch, then after few losing trades he will stop with trading again - right when good patch for the system happens again.

As we speak, our system is going through one bad patch. Since 4. December it lost 1215 points and if one looks from 15. December it lost 249 points. For some it might look like 1215 points is a lot, but that is one good trade.

I believe that discipline is the most important characteristic for system traders on any time frame – in case when trader has system with positive expectancy and sound money management. If you don’t have patience to follow the system through good and bad patches, then your first task is to work on it and to improve discipline in trading one must improve discipline in his life outside of trading. So, next time when your clock rings get up immediately, don’t skip planed gym session, don’t skip STOP sign on the road, etc. Simply, try to improve your discipline in life in order to improve your discipline in trading.

Another problem derived from lack of discipline is that one can close winning positions early, but will leave that one for the next time.

Trade with trend!


Anonymous said...

Igor,the way you discuss the practical aspects of trading with simplicity and honesty is refreshing. In todays delusional world all want to be heroes overnight, yours is a voice of sanity in all the noise. Thanks for posting.

Alsi Trader said...

Thank you Anonymous for your kind words and interest.

Nilesh Moodley said...

Thanks Igor. You give sound advice, as always. Your guidance is thoroughly appreciated...

Alsi Trader said...

Thank you Nilesh for interest and for your comments here on blog and twitter.

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