Systems Trading (Part 4) By Jake Bernstein www.trade-futures.com

System Trading, Discipline and Profits

•    Cut your losses and let your profits ride.
•    The big money is made int the big pull
•    Don’t add to a losing position.
•    Always use stop losses.
•    Don’t meet margin calls.
•    When in doubt stay out.
•    The trend is your friend.

The cliches are worn and weary.  By now you’ve heard the rules about trading discipline at least a thousand times and you’re tired of hearing them.  To most traders these rules are nothing more than words –simple to understand but near impossible to implement.  And there seems to be little anyone can do to drive the point home.

Traders are only human and, as a consequence, subject to the limits of ego.  We are unwilling to accept losses, unhappy when profits are small, afraid when prices are too low and too brave when prices are high.  Regardless of how often traders take losses, they rarely learn from them. In one form or another, this subject has been the focal point of numerous books, tapes, seminars, courses and psychoanalysts’ couches.   Few traders ever learn how to descipline themselves no matter how many losses they take.

Even more amazing is the fact that many traders are still convinced that their ticket to success is to find a better trading system.  Actually, most traders will lose with any trading system no matter how well it tests, or how promising it appears to be.  A disciplined trader can be highly successful with a mediocre trading system, and a bad trader can be a failure with an otherwise outstanding trading system.   Clearly, there is only a limited positive correlation between trading system potential as revealed by historical testing and its actual performance in the hands of a trader.  There is absolutely no doubt in my mind that the trader makes the system and not vice versa.  This understanding should come as no surprise to any trader who has had a few years experience in the markets (and it already may be clear to those who have been trading for only several months).

During my years as a trader, I’ve drawn extensively on my experience as a psychologist, my profession by education.  My observations of trader behavior, including my own, have led me to the conclusion that to focus on improved trading systems before ‘healing” the self is to take the first step toward ruin.  While WT is a highly viable method, it will not help you if you lack discipline.

Now that the problem has been stated, the issue is how to remedy it.  To suggest that I can provide the answers in several pages of text would be the height of sophistry.  I can, however, address the subject with considerable  authority given my years of trading experience and my intensive observations of how others trade.  Traders throughout the world have told me of the benefits they have derived from my 1980 book The Investor’s Quotient and from my 1988 book Beyond the Investor’s Quotient.  Both books provided solutions to the behavioral and psychological problems shared by many traders.  My work with trading systems both as developer and trader has given me a unique perspective on the discipline problems that face all traders.  Although my suggestion can be very helpful, they are not to be taken merely at face value.  They will need to be implemented, studied and refined to fit your trading style andy our personality.

Part One, Part Two, Part Three, Part Five, Part Six, Part Seven, Part Eight, Part Nine