Today we’re going to talk about how to trade with more discipline and without emotion. Obviously it’s very, very difficult to do, but I want to focus on preparation. I’ve mentioned this before. One of the ways that I was able to take emotion, which you can’t do overnight, but you can remove emotion over time once you get used to your routine. It’s just like your first day of school. You’re excited after the first, well, by the time you’re at midterms, you’re like, Ugh, trading’s the same way. So I removed the emotion decades ago from having a daily process, was talking about it a bit yesterday in how to outperform 99% of your peers. But in order to have the discipline, I think you need to know what you’re going to do before you actually need to do it or execute what it is that you need to do.
You understand, and I’ve talked about the art of war. I’ve talked about: “Victorious warriors first win then seek battle.” By my having a plan that I knew I could execute day after day after day. Having that the night before, it gave me a great sense of confidence. And if you’ve listened to the show before, I’ve said that if you take a person with average ability really is dumb as the damn doorknob, but you fill them with a model that they can follow that has positive expected value and that they can replicate day after day after day, they’re going to have great success. When you can infuse somebody with confidence, they feel unstoppable, and that’s kind of what I want you to have for yourself. But you only get that when you know can count on yourself. You can’t count on people who are going to try to give you signals or tips and this, that, or the other thing.
You can’t count on in the Telegrams. You can’t count on the Discords. At the end of the day, it’s up to you and you have to follow your own drummer. You have to be the drummer. And so when I knew, and this all happened kind of by accident, right? Because I was experimenting, I didn’t really have anyone to help me. So in many ways I’ve had support over the years for sure. But all my trading stuff I learned by myself through massive amounts of trial and error, capital on the error. There’s a lot of it. So to detach the emotion from things, it really came from my being prepared, at least for my temperament and my emotional makeup when I knew at least I had a plan coming into the next day. I didn’t feel so, I don’t want to say unprepared, but I didn’t feel clueless.
I didn’t feel like I didn’t know what I was doing. I felt like even the best traders could see themes unfolding. They could see patterns emerging, not just chart patterns, but patterns in consumer behavior, patterns in the cyclicality of the commodities markets and the secularity of the equity markets. So that’s the kind of data that I studied more than chart patterns. That gave me a sense of confidence so that I felt a lot closer to my goal at that point, and that was really important. I know everyone wants to say like, Hey, you can just make all this money working one hour a day, but for me, if that’s the case and work an hour a day, it’s the hour in the evening that I prepare for the next day because now I know always what the worst case is. That to me, I always had to define.
I knew that if something was going to win, there is a certain knack to how do you handle winners. I personally think that that’s the hardest trade is how do you take winners? When do you know you should take them and not live with regret? Because then you could see the thing move on, and it happens. It happened to me two weeks ago. It’s the way it goes. You get knocked out of a trade. You did the best that you could. I did the best that I could. I’ll speak for myself, and we can’t predict things. So I let go of all the emotion around that, that I should have some type of predictive ability. And all I knew was like, okay, if the thing’s going up here, this is where I want to enter long. I know that’s where I could enter my stop.
I knew how much money I was going to risk on a per trade basis. Therefore, I could position size and know the number of shares or contracts if I was looking at commodity futures or puts and calls, and then where’s my protective stop. That to me is a complete program to get started. Once you start making money, then you’re going to have to apply a little bit of art and science to it. I know a lot of folks like to take things off at 3R. It’s probably a good start until after a while when you see things go. If you looked at Nvidia breaking out at $500 with $15 ATR, if you took it off at 3R, it was good trade. You made your money, you made 3% or whatever, or no, you made more than that. But what did you do to get back in after it kept going? So these are the types of issues that I had to deal with and learn about from lots of trial and error and risking real money, not using simulators. Again, I was lucky in that there weren’t a lot of simulators around at the time. I had to kind of create my own macros on Lotus 123 to kind of run the trading rules. So it was such a pain in the ass, but man, I got through it.
Having the discipline to me is being able to repeat a process day after day after day, even though you don’t know, because there’s uncertainty and the uncertainty can hit you a couple of ways. We talked about it a little bit yesterday. I wrote about this, by the way, in The Inner Voice of Trading, which I wrote in 2011. I give away the audio book for free. I was published by FT Press, like I said in 2011. It’s got over four star reviews at Amazon. The link is in the description if you want the free download, and I talked about the trials and tribulations about how I got my head kicked in basically for four years trying to figure all this stuff out. I kept really, really good notes about what my expectation was, what did I think was going to happen, how I felt about things, and then how did it actually play out? And then I was able to go back and double check like, well, why did I think it was going to behave the way I thought it was going to behave when it actually behaved this way? Where could I clean up my own analysis? And this was something that I did every day. I knew I wanted to learn a lot about myself. I knew I was the weakest link in my trading. It’s not the market’s fault. The market doesn’t even know I’m participating. Whether you’re institutional or even retail, the market doesn’t really know that you’re there. Sure, in the short run, you can push a few things around, but it’s not personal. Whenever I lost money, I didn’t take it personal. I didn’t feel like the market was out to get me.
And I knew because I knew math, that having positive expectancy was a huge edge. Once I knew that I had my rules, had positive expectancy, it was now a function of tweaking those rules and trying to make them a better fit for me emotionally. I wanted compatibility between what I knew how to do and what I thought so that I could replicate that again day after day after day with without going through histrionics and even to take tranquilizer like Michael Marcus did. So at the end of the day, if you do this type of behavior day after day after day and stop worrying about your p and l, you’re actually going to grow a lot as a human being because you’re going to be able to emotionally detach from the outcome and attach yourself to the discipline of your process that you can replicate day after day after day.