Emotional Discipline for Traders

It’s a great business, one you figure out what you want to do

—Dick Diamond

I understood everything about trading but I could not be profitable until I gained emotional discipline. The ability to execute a trading plan consistently is the biggest challenge in trading because it is principally a psychological problem. Since every trader has a unique psychological makeup, he must find a system that matches his individual psyche. What works for one trader may be totally wrong for another. I could not be successful trading until I incorporated three elements in my plan: An understanding of my trading psyche, a trading system that is in harmony with my mindset and experience trading my system.

I traded on the wrong side of the equity curve for a long time before I sorted this out.

 My Trading Psyche

There are things in trading I cannot do. It matters not that these things are efficacious and that others execute them flawlessly and make lots of money. I can’t do them because the emotional part of my brain wants no part of them. Like it or not, the emotional part of my brain heavy handedly makes most of my decisions in a trade.

Social psychologist Jonathan Haidt describes the brain and the way it works with a metaphor given by the Buddha: The rational part of the brain is the rider on an elephant. The elephant is the emotional part of the brain. The rider can get the elephant to go where he wants it to go so long as the elephant wants to go there, too. If the elephant is not having any, it’s game over. Moreover, Haidt argues that our commonly accepted notion that the rider does all the thinking and the elephant does all the feeling is wrong. In The Happiness Hypothesis, Haidt cites research indicating that the elephant is doing lots of thinking, too, which gives it extraordinary power over the rider.

Traders may try to eliminate the influence of their emotions on their trading, but I don’t think it happens. I believe that successful traders intuitively accommodate their trading style to their emotional makeup. Haidt shows us that the elephant’s responses (emotional) are much more powerful than the rider’s (rational). Altering the elephant’s behavior and influence is not impossible, but it is much easier for a trader to recognize the pachyderm’s proclivities and devise a trading style the emotional side of the brain can embrace.

I’m a trader and it may surprise you when I say I don’t like being in the market. I was able to be honest about this after reading master trader Mark Weinstein’s interview with Jack Schwager in Market Wizards. Weinstein freely admits to fearing the market, yet his trading account statements reveal that he is extremely successful taking small pieces out of trading moves using high probability entries for very short term profits. I never was able to stay in trending moves because I am uncomfortable riding out significant reactions. I don’t like trading systems that generate big draw downs or depend on big trades to produce the profits in the system. I am happiest when I am liquidating my long position when the crowd is frantic to get aboard or my short position when the players are desperate to get out. I like taking my position just before a long bar in my favor takes me out profitably.

Happily, I can do this and make a nice living trading a system that accommodates my elephant.

 The Nature of My System

Dick Diamond teaches a method of trading in his seminar that is entirely aligned with my psyche. The setups I like best come in the consolidation between the first move off a turn and the continuation of the move. These trades have a high degree of reliability. I can expect to get one to three such setups a day in the time frame I trade, with 70-80% of them profitable. As with all good systems, the better trades start working right away, often with a powerful thrust of buying or selling following my entry that makes it easy for me to follow Dick’s dictum to “Sell when you can, not when you have to.”

Like a turkey hunter, I sit very still for much of the day as I wait for my entry. Once I have taken the trade, I expect to be out in less than an hour. Usually it’s a matter of minutes to get an exit signal. If I’m making good trades, four out of five will be profitable. For me, it’s a very satisfying way to trade.

 My Experience

Dick defines emotional discipline as “following 100% of your plan 100% of the time.” Now that I am trading a system that fits my particular emotional makeup, I am finding it easier to stay on track identifying setups, taking trades and managing positions. I had no chance to gain emotional discipline as long as my trading plan was in conflict with my psyche. The elephant just wasn’t going to go there.


Trading psychologist Brett Steenbarger holds that it is essential for each of us to find our own trading niche. That has certainly been my experience. Unfortunately, there doesn’t seem to be an easy way for a trader to do this other than trade, fail, and hope to stumble on the solution before tapping out. After much effort and much failure, I developed my trading style by eliminating the things I can’t do and working with what was left.

Elsewhere I’ve written that my essays are a meditation on my personal journey as a trader. If these thoughts help you, that’s good.




Haidt, Jonathan, The Happiness Hypothesis, Basic Books
Steenbarger, PhD, Brett N.,
The Psychology of Trading, John Wiley & Sons
Schwager, Jack,
Market Wizards, HarperBusiness

The author makes no representation as to the accuracy of the quoted material, but believes the sources to be reliable. No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

This entry was posted in For Traders. Bookmark the permalink.