Self-Control: Expanding Your Limits

by Mark Turcotte

Winning traders are "disciplined." They don't allow their emotions or impulses to get the better of them. They approach the markets in a way that allows them to trade skillfully. As one professional hedge fund manager put it,"[Trading is] just like sports. The difference between the physical abilities of the top pros is virtually nothing. But the mental difference is huge. The guys at the top...are mentally
consistent...It's the same thing in trading. The psychology of professional traders allows them to stick to their strategies. They don't stress out as much as the rookie traders. I still make mistakes once in a while, but not as much as I did... It's impossible to eliminate all of it. I still fall victim to doubt and other
psychological pitfalls. I still have major doubts and stress starting to come in...As far as dealing with the ups and the downs, this requires a combination of research and experience. After a while, making or losing a lot...becomes second nature...there's a sense of normalizing the ups and downs...you don't get as excited over them. It's just an event...After a while, it's just a cycle." Maintaining
discipline and control doesn't mean that winning traders don't have a passion for trading. Of course they do, but at the same time, they don't allow their emotions or impulses to overwhelm them. Over time, and with a vast amount of experience, trading becomes commonplace and one naturally approaches trading with the proper mental edge.

Trading requires discipline. A trading plan is of little value if you abandon it prematurely. The disciplined trader executes a plan and controls his or her emotions until the plan comes to fruition. Although most traders intellectually understand the importance of discipline, many would-be traders have trouble staying controlled at critical moments of investing.

Drs. Baumeister, Muraven, and Tice (2000) argue that self-control is a limited resource. When we show self-control in one area, such as trying to control our diet, we don't have energy left to show self-control in other areas, such as concentrating on following our trading plan. Now, that's not to say that one should abandon dieting in order to be a disciplined trader, but it's useful to consider that humans have limits regarding their ability to show self-control. Self-control is like a
muscle. If you try to lift too much, you'll wear yourself out and you'll need to get some rest before you can try lifting a heavy object again. The same can be said of self-control. In a recent review of the scientific literature, Gailliot and Baumeister (2007) document a vast array of evidence that shows that after participants complete one laboratory task on self control, they have difficulty performing a second task. For example, if you try to avoid eating your favorite snack, studies have shown that you are likely to give up when trying to complete a frustrating task. Self-control is a limited resource. Just like when you work out. If you work out too long, you need to rest a little while before doing physical exercise.

Stress can reduce your ability to maintain self-control while trading. Coping with stress saps up the limited psychological resources you have to devote to self-control. A study by Oaten and Cheng (2005) illustrates how stress limits self-control. They randomly assigned participants to complete a task either under stress or under no stress.

When participants were stressed out, they had difficulty completing the laboratory task. They also reported having difficulty keeping up with demands in their everyday lives, such as controlling their diet or keeping their house clean.

These findings suggest that self-control is like a muscle that can become worn out. If you try to trade while overly stressed out in your personal life, you'll have trouble sticking with your trading plan, especially if you are a novice trader who has relatively little experience maintaining discipline when your money is on the line. It's important to be aware of your ability to maintain discipline. Just like
a muscle,if try to do too much, your self-control "muscle" will fail. Rather than over-taxing your limited self-control resource, it's vital that you start out slow and work up to gaining more self-control.

How do you build up self-control "muscles"? First, minimize daily stressors, or if you have a lot of stress, cut back on your trading until you can alleviate stress and free up psychological energy in your personal life. Second, do self-control workouts. The more practice you have at self-control, the more likely you'll be able to stay disciplined while executing a trade. You might try a visualization exercise in which you imagine yourself executing a trading plan and maintaining self-control under a variety of scenarios.

The winning trader is the disciplined trader. But discipline isn't easy to come by. It's vital that you acknowledge your limitations. Don't set yourself up for failure by thinking you can be disciplined all the time. Like everything else, discipline takes practice. The more you can build up your self-control "muscles," the more easily you can execute your trading plans with grace and decisiveness.