The Future-oriented Trader

The Future-oriented Trader

Winning traders are disciplined. Rather than trading by the seat of their pants, they formulate a very detailed trading plan and follow it. Not everyone can trade with such resolve, however. Some people just don't have the personality to stick with a trading plan. They are focused on immediate gratification. They want to get in fast, make a quick profit, and get out. In the days before decimalization, scalping was common. The scalper could get in and get out and make a quick profit. Many scalpers, however, noted that making trade after trade all day long was daunting. It rapidly sapped up psychological resources and required a pace that was hard to maintain. In today's markets, it is even more difficult to scalp. Short-term trading requires staying in the market longer, and that means future-oriented traders, who can show patience and discipline, have an advantage.

Trading isn't the only arena where discipline is rewarded. In the academic environment, it's vital to be future oriented. Day after day, the best students study diligently for rewards that may not be forthcoming. They have to work hard, but wait for a reward that comes well into the future. Dr. Kris Kirby, a psychology professor at Williams College recently conducted a study (Kirby, Winston, & Santiesteban, 2005) illustrating how the ability to control impulses can be pervasive and predictive of success. People who could not show self-restraint in a laboratory task tended to receive lower grades in college.

In the study, college students participated in a mock auction in which the ability to take a future-oriented perspective was rewarded. Students made sealed bids in which they competed with other students with regards to how long they could postpone taking a reward. The auction went something like this: one student might say, "I'll wait one day for $20," while another student might say, "I'll wait one week for $10." The person who could wait the longest for the lesser amount of money won the actual dollar amount. In this case, the person who agreed to wait for an entire week, versus one day, and requested less money, $10 versus $20, won the auction and was paid an actual $10 by the researchers. This task is similar to trading in that rewards are given to those who can postpone immediate gratification for a later greater reward.

The ability to delay instant gratification was positively correlated with grade point average. Compared to people who preferred immediate rewards, participants who could wait longer tended to be those students with better grades. This finding suggests that being able to delay gratification is a personality trait. One's ability to show self-control develops over time and is consistent across situations. In other words, if you don't show self-discipline in your everyday life, you probably will have trouble showing self-discipline when it comes time to execute your trading plan.

If you are a pleasure seeker, you might want to keep a close eye on your ability to maintain discipline. Does it mean that you are doomed to mediocrity? Probably not, but you should not underestimate the difficulty of maintaining discipline if you have trouble with self-control. You might want to practice self-control in your everyday life. Practice makes perfect. Your ability to show self-control is similar to a muscle. If you don't use a muscle, it becomes weak. Similarly, if you don't practice self-control strategies, you'll have difficulty maintaining self-control. Try some simple self-control "exercises." See how much you can control your eating, for example. Or while studying new trading strategies, see how well you can continuously concentrate and focus on what you are studying. Try to diligently read in a quiet place for an entire hour at a time, taking 10-minute breaks before continuing. You might also make a practice trade with a little money that you can afford to throw away, and see how long you can stay in the trade before closing it out. See if you can stay in the trade even if the market starts moving against you. (It is merely an exercise. Don't risk very much money. Just see how long you can stay in the trade without getting out.) This test of self-control can be difficult for some people. Looking at your screen during a trade can be as tempting as standing in front of a slot machine and trying not to put in a dollar and pull the handle.l calm and secure. And when you feel relaxed, you'll think rationally and decisively, increasing your chances of success.

Don't underestimate the difficulty of maintaining self-control. Many novice traders have great difficulty sticking with a trading plan. It's a common malady, but one that can be conquered with practice.