10 Specific Tactics to Become a More Patient and Disciplined Trader

When I first started trading, impatience was a major problem. Fearing I’d miss out on a major price move, I’d hurriedly enter into positions which didn’t fully satisfy my trading plan’s entry criteria. Or, I’d enter a position late, and skew the risk:reward ratio against me. When volatility increased and a stock’s price fluctuated, I’d become jittery and sometimes exit a position early. I’d spend too much time watching the intra-day price fluctuations, even though this had no relation to my longer-term trading strategy. Fortunately, I was at least using a system and didn’t lose too much money.

Over several years, I’ve adopted several tactics to help avoid impatient and undisciplined trading. In general, these tactics include tools, habits, techniques, tips and tricks which have collectively made me more patient and disciplined. I’ve discovered these both through trial and error and learning from others.

Causes and Effects of Impatience

When it comes to trading, fear and greed are two powerful human emotions. Traders can have a fear of missing out (FOMO), a fear of losing money, or a fear of not being right. Greed also comes into play when traders want instant gratification, are drawn to “get rich quick” schemes, or expect an unrealistic amount of profit. Another emotion which comes into play is boredome. It can be said good trading is methodical and disciplined, rather than an activity filled with thrills and excitement.

These emotions combine to make traders impatient and undisciplined. Professional traders and investors know this all too well:

“The stock market is a device for transferring money from the impatient to the patient.” — Warren Buffett

“After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!” — Jesse Livermore

Some negative effects of impatient trading can include:

• Taking too much risk: With an urge to quickly make a large amount of money, a trader enters into a trade with too large of a position size or with too much leverage. Similarly, with FOMO, traders may impatiently enter a trade when the risk:reward ratio is no longer in their favor.
• Over-trading: Not waiting for good setups before entering trades, or entering sub-par trades which don’t match the trading plan’s criteria.
• System hopping: Not giving a profitable system a chance to make money before switching to another one.
• Entering too soon: Fearing the price will get away from them, traders will hurriedly enter a trade at a price where the risk:reward ratio is not in their favor. Or, in fear of losing too much money, a stop-loss will be set too close to the entry price.
• Exiting too soon: Fearing the price will turn against them and the profit will evaporate, traders exit before hitting their price target.

There are undoubtedly some general approaches to overcome the fear, greed and boredome which accompanies trading. However, in my experience, the practical application of a number of specific tactics has proven most effective.

#1 Avoid Using Market Orders

A market order is an order to buy or sell at the best available price in the current market, or the “going price”. Market orders may be appropriate for stocks which trade on very high volume and have a narrow spread between the current asking price and bid price. However, in my experience, other order types are generally more appropriate.

Nothing smacks of impatience more than a market order, which basically amounts to, “just sell me this stock right now at whatever the going price is”. As an end-of-day trader, there’s probably nothing worse than entering a market order after the market has closed, then having the order filled at whatever the going price is when the market re-opens; when the market re-opens, the price may experience a gap, skewing the risk:reward ratio of the trade against you.

For both buying and selling, there are numerous alternatives to market orders; for example:

• Stop-limit orders to buy a stock: A stop limit order consists of two stages. When price hits the stop price, the order is initially triggered. However, the order will not be filled unless the price is at or below the limit order price. Unlike a market order, a trader can set the limit order to a price where the risk:reward is still favorable. If the price gaps up when the market opens and blows past the limit order price, the order will not be filled.
• Limit orders to buy a stock: One alternative to market orders is to set a limit order somewhere below the asking price. In my experience, the stock’s price will typically fluctuate enough to fill the order. One rule of thumb I’ll sometimes use is to set a price which will at least pay for the trade’s commission.
• Limit orders to sell: If you’re already in a long position, rather than exiting with a market order, an alternative is to set a sell limit order at the price target. In my experience, merely going through the motion of entering a sell limit order at a price target instills more patience and discipline to wait for the price to hit this target.

Market orders require traders to constantly monitor price, then log into your trading platform to execute the trade. Unlike market orders, limit and stop-limit orders have more of a “set it and forget it” quality to them. Using these types of orders, a trader may need periodically update the order parameters, but can otherwise let the trading platform execute the orders when the price is right.

#2 Use Alerts to Watch Stocks for You

When I first setup my trading account with Interactive Brokers, I noticed their trading platform allowed the setting of alerts with the single push of a button. I was initially trading from a group of about 20–30 stocks on a watchlist, and used alerts to signal when prices reached levels I was interested in buying or selling the stock. At any given time, I might have 20–40 active alerts.

The initial goal in setting so many alerts was to save time and effort by not having to constantly watch the price on all these stocks. Over time, however, I began to appreciate these alerts were keeping me from being exposed to daily priced fluctuations, and helped me enter or exit positions only when the price was right.

On some platforms, alerts are not only limited to price. For example, on the TradingView website, alerts can be set for any technical indicator, such as RSI, moving averages and the like. To the the extent these technical indicators are part of an overall trading strategy, these types of alerts will trigger only when the conditions are right for an entry or exit.

The prolific use of alerts may sound too simple to be effective. However, in my experience, they are not only a time saver, but shield a trader from having to watch price short-term price fluctuations which are not related to a long-term strategy.

#3 Log Out of Your Trading Platform (or Website) During Market Hours

Unless you’re day-trading, there’s very little reason to stay logged into a trading platform (or website) all day long. In my experience, intra-day price fluctuations can be jarring and there are more productive uses for this time. The advent of smartphones and trading apps hasn’t helped either.

If you’re using limit orders and alerts as described above, at most you’ll need to log into your trading platform once a day to enter new orders, update existing order parameters, or to set alerts. This should take no more than 5–10 minutes, and can be done over lunch or near the close of the market.

I also recognize that brokers have an inherent conflict of interest, in so far as they only make money on platform fees and commissions; in other words, brokers make more money the more you trade. For example, some trading platforms will display the daily P&L (amount of money your account has gained or lost today), even though this likely has nothing to do with your trading strategy; the only effect of this is to possibly contribute to over-trading. Similarly, trading platforms also display breaking news, analyst ratings, social media feeds and other information which is also may be unrelated to a strategy.

Along these lines, one analogy I’ve heard is that brokerage websites and trading platforms are essentially set up like slot machines, with all the bells and whistles to encourage you to trade more and therefore boost commissions paid to the broker. Put another way:

“ Having a quote machine is like having a slot machine on your desk — you end up feeding it all day long. I get my price data after the close each day. “ — Ed Seykota

Whether or not it is intended, trading web sites and platforms often times present news and information which conflicts with a trading strategy. In general, all that I ask from my broker is to maintain my account and to dutifully execute the trades as requested. To accomplish this, there’s no need to stay logged into the account throughout the day.

#4 Use Dedicated Accounts for Specific Strategies

The primary strategies I trade with are on a longer timeframe, whereby I hold positions anywhere from weeks to months, and typically only make 1–2 trades per month. This style of trading is also called position trading, versus shorter term strategies like day-trading and swing trading. Position trading strategies need years to play out, so it’s very important to be patient and disciplined.

Some traders will co-mingle different strategies in the same account. In my experience, this has several disadvantages; for example:

• It’s more difficult to get a clear picture of the strategy’s performance, in isolation from other strategies used in the same account.
• Even though a particular strategy may be on a longer timeframe, you’ll find yourself looking at fluctuations in price almost daily.
• In the same account, there’s more of a tendancy to system hop or toggle between different systems.

After initially co-mingling all my strategies in a single account, I decided to create separate accounts for my long term strategies. I set up these accounts with the intention of trading the same system in for at least 10 years. A broker can link multiple accounts, so it is still very easy to switch between accounts for entering orders, viewing performance reports, etc.

To use an engineering term, this is like putting a system into “production”. When a system is in production, the goal is to methodically “turn the crank” and faithfully execute the strategy, not to continuously experiment. To the extent these accounts are earmarked for a specific system, there is less of a tendency to system hop or abandon the system in favor of another one in the same trading account.

#5 Use a Smaller Experimental Account for Learning and Strategy Development

Even if dedicated accounts are used for specific strategies, I’ve found it is still beneficial to have one or more accounts dedicated to learning, experimentation and new strategy development. For these purposes, I currently have two different experimental accounts for trading stocks and Forex.

To use a golf analogy, these experimental accounts are like a driving range, while accounts dedicated to specific strategies are akin to a full golf course. A driving range is where golfers hone their skills, hit lots of balls, and make adjustments to their swing. Similarly, an experimental trading account is a good place to try new strategies or engage in more frequent trading to learn about price action, market behaviors and the like.

One alternative would be to use a practice, or demo account. However, without any real money involved, there is less motivation to remain actively interested and to closely monitor the trades. Even risking $50–100 per trade can increase one’s attention and focus.

Another benefit of these experimental accounts is they divert your attention from longer term, dedicated strategies. For example, the trading in an experimental accounts might be shorter-term swing trades. I’ve found this type of discretionary, short-term trading allows for ongoing learning, experimentation and strategy development. To the extent the experimental account is used for more frequent, shorter-term trading, I can get this type of discretionary trading “out of my system” with a smaller, experimental account, while methodically executing the longer term, production strategies in their dedicated accounts.

#6 Favor Systems which Have Lots of Entry Signals

If a trading system generates relatively few entry signals, there can be a tendency to take every single entry signal, or to relax the system’s parameters to enter sub-par trades. Knowing there is unlikely to be another signal in the near future, FOMO and boredome can become an issue, and a trader might also chase the price and enter with a poor risk:reward ratio.

On the other hand, if a system generates many signals, a trader can rest assured another trading opportunity is just around the corner, and not feel impatient to take a sub-par trade. I believe it was Dr. Alexander Elder who compared trade entry setups to catching a bus; If you miss one bus, there’s always another one coming around the corner!

One of the reasons I prefer to trade stocks, is there are literally thousands of stocks to choose from. Depending on the strategy, or if trading multiple strategies, there is never a shortage of entry setups.

#7 Backtest Your Strategies

If a system is purely discretionary, the entry and exit decisions are based upon a trader’s subjective decision making. A trader undoubtedly incorporates some rules and guidelines when making these trades, but there are not statistics backing up the profitability of the system.

At a minimum, a trader can keep a spreadsheet (journal) which tracks statistics as the trades occur. If the system is not amenable to computerized backtesting, a manual backtest can be performed by reviewing historical charts and logging trades when they would have happened.

To the extent some or all of a system can be backtested, backtesting can provide performance statistics including, but not limited to:

• Win-rate: The expected percentage of winning trades versus losing trades.
• Profit factor: Expected profit versus loss ratio for all trades.
• Maximum Drawdown (MDD): Over time, the maximum percentage the system will lose versus previous highs.

Backtesting can give many other types of statistics, but the 3 above are what I primarily focus on. I’m a relatively conservative trader. Given my own personality and risk tolerance, I like to trade systems which have at least a 60% win rate, at least 2 for a profit factor, and a maximum drawdown of 20–30%.

How does backtesting help with more patient and disciplined trading? When going into, or planning an exit from a position, having some statistics to back up trading decisions adds more confidence, composure, and patience. For example, if backtesting determined that a trailing stop yields the best performance, a trader will be less inclined to become impatient and exit early because of an individual position’s fluctuations. In general, backtesting promotes thinking in terms of statistics and probabilities rather than individual trades; in other words, trading more like a business person than a speculative gambler.

Even for long term investing, my preference is towards strategies which can be backtested. In particular, I invest in index funds and ETFs, then use relatively simple timing models to help manage risk during bear markets. I personally can be more patient with these types of strategies, rather than investing with a mutual fund which may experience a 40–50% drawdown in a bear market.

#8 Use Smaller Position Sizes

Over time, I’ve learned position sizing plays a very important role in increasing the patience to more faithfully execute a given strategy. Ostensibly, position sizing is more about financial risk control than instilling patience and discipline. Over time, however, I’ve appreciated keeping position sizes small helps me stay more composed and patient as well. Conversely, when a position size is too large, fear can override the discipline and patience needed to methodically execute a trading strategy. Put another way:

“Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth. This is essential as large fluctuations can engage {emotions} and lead to feeling-justifying drama.” — Ed Seykota

There are some good rules-of-thumb when it comes to position sizing and risk. For example, most traders will not risk more than 2% of their account principal on a single trade, while more conservative traders will never risk more than 1%.

When I first started trading, I’d typically hold 5 positions at any given time, risking at most 8–10% on each. While this type of position sizing and risk management satisfies the 2% rule, I would constantly watch the short-term price fluctuations and didn’t always give these positions room to run.

Over time, I’ve changed my trading style to hold 10–12 positions, and risk no more than about 1% on each. If you think about it, provided the 10 positions also match a system’s criteria, there’s really no difference between holding 5 positions or 10. A psychological advantage I’ve seen is to have what I call a “healthy level of indifference” towards individual trades. If an individual trade experiences short-term fluctuations, I’m much less likely to capitulate and sell than if I had only a few positions.

If I had to choose one tactic which has most postively impacted my trading patience and discipline, smaller positing sizing is definitely it! I’ve dialed back my position sizes to the extent I don’t really worry about fluctuations from any single position. In general, I can sleep at night and more patiently and methodically execute my trading strategies.

#9 Use Checklists to Score Trades

Before entering a trade, fill out a checklist which grades the setup versus the trading strategy. If a setup does not pass the checklist, pass on the trade. Going through the motions of filling out a checklist will not only lead to more consistent and less impulsive trading, but you will feel more accountable to yourself and trading plan. At the very least, filling out a checklist will slow down the trading and provide more time to rationally consider the go/no-go decision.

#10 Just Keep on Trading

There is a novelty and excitement when first starting to trade. Like starting any new avocation or profession, trading offers the excitement of a new challenge, opportunities for learning, and the promise of success.

New traders very carefully watch their positions, spend hours upon hours studying charts, and look forward to all those profits hitting their accounts. When reality sets in, it’s very jarring to take losses on individual trades, to watch winning trades turn into losers, or to immediately be stopped out of a position.

Over time, trading starts to feel more natural. An experienced trader begins to appreciate bad outcomes from single trades are not representative of the overall system. There’s not a need to constantly watch every twist and turn in the market. The thrill of watching price fluctations may subside, but there is still fulfillment to:

• methodically execute existing strategies;
• research new strategies;
• continuously improving existing strategies; or,
• refine the overall trading process.

The analogy I can think of here is learning to drive a car. When first learning to drive, it is both an exciting and overwhelming experience. There is information overload to keep an eye on all the buttons and gauges. At the same time, a new driver must very carefully navigate the road and watches for obstacles. Over time, driving becomes more natural. An experienced driver can focus more on the horizon, while occassionaly glancing at the gauges for confirmation.

Many new traders today are likely drawn to the thrill and excitement of cryptocurrency trading or day-trading. In reality, this type of trading may not be a good fit for new traders’ exerience levels, personalities or risk tolerance. Over time, through trial and error and learning different trading strategies, these traders can hopefully find a more suitable trading style. This is yet another reason to be persistent and keep on trading.

Other Tactics (Honorable Mentions)

The tactics described above are most noteworthy with respect to my evolution and current style of trading, but they are by no means a complete set. Some other tips, tricks, and techniques I’ve found useful include:

Distract yourself from actively trading: Unless you’re a day-trader, trading is not a full time, 9–5 job; for example, as a longer term trader, I only spend 1–2 hours per week actually trading. Methodically execute a system, but don’t spend more time than is needed watching live charts, logged into a trading platform, watching the daily P&L, etc. Focus on more productive activities, such as:

• Your day job.
• Go to the gym.
• Work on other projects.
• Studying charts after market close.
• Backtesting systems.
• Researching new strategies.
• Journaling trades.
• Continually learning by reading trading books, listening to podcasts, etc.

Consider taking a partial exit: Booking some profits and reducing the position size can help you be more patient and let the remainder run to a more aggressive price target.

Consider using a “let’s see what happens” (LSWH) trailing stop for exits: If the price initially blows past a price target, rather than exiting immediately, one tactic is to instead put a trailing stop in place just behind the price target. This requires an alarm rather than limit order at the price target. However, I’ve found this can be a useful technique to get some extra profit out of a trade.

If your portfolio is already full of trades (i.e., “topped off”), be extra selective with entries: What do you do when a portfolio is already “topped off”, but there is room for one more position? If there are multiple opportunities to enter new trades, this is a scenario where some discretion can be used to be more selective. For example, limit orders can be placed at entry points which maximize risk:reward.

Dedicate a 2nd computer to trading: I recently moved all my trading spreadsheets, backtesting scripts, and trading software over to a dedicated laptop. What’s nice about this setup is I can go onto this computer only when I need update my orders, update my tracking spreadsheets, etc. Then, during market hours, I shut the clam-shell and step away from actively trading altogether.

Final Thoughts

In my experience, there’s no quick fix or single tactic to become a more patient and disciplined trader. The tactics described above have helped me, but it has taken both time and trial and error to find specific tactics which fit both my personality and trading style. I’m always on the lookout for new tools, techniques, and tips to continuously improve my trading.

Depending on your own trading style, there may be other tactics which work better for you. Whether or not the tactics above are applicable to you, hopefully they provide some food for thought and ideas to consider.

Originally published at https://www.sroehling.com on May 10, 2019.