Discipline in Trading – January 12, 2022


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I’m Scott McGregor, swing trader at Stock Market Mentor, and I am joined here with the president of Stock Market Mentor, Dan Fitzpatrick.

Scott: Dan, you know with the state of the market right now I think it’s really important for traders to really focus this year on taking the next step in their trading journey and their growth. And so I thought it would be a great opportunity to kind of pull from your experience and help traders actually figure out how to do that.

One thing that I really want to know from you, and something that you talk about that is really important, is knowing what kind of trader you are. How do traders go about, first off, despite reading charts and trying to figure it all out, how do they figure out what kind of trader they actually are?

Dan: Those are really good thoughts and it is really important because here’s the thing, if you don’t know what kind of trader you are then how do you know whether you are getting better or not? One thing I have learned, this isn’t a new concept but it probably is for most people, you can’t improve on something if you can’t measure it. You have to be able to measure, not what you want to do but what you actually are doing. And then when you look at that,: what am I actually doing? Well, my average holding period is 3-minutes but I am trying to be a long-term trader. Okay, well you are not a long-term trader, you are basically a day trader. And various other things like, well, I like to buy stocks and just hold them for a long period or buy a dividend stock like Annaly Capital ( NYSE: NLY ), we held that for probably a year and a half, it paid us $.22 every quarter and our initial cost basis was $7.30. So you multiply $.22 by 6 or 8 times, that’s a pretty good return.

But if you are a short-term trader you are not going to be able to handle that thing because it will just be boring. Even though you look at the money that you are making, that is literally not enough motivation for people. Or getting away from dividend stocks, maybe you just like to hold things for the long-term and then you wind up seeing as you measure your trades, as you actually look at your results and look at the ugly truth. You are holding a stock for 2-weeks and you sold it because it had just kind of a natural reaction pullback but you were afraid of losing the money that you had already made.

So there are all of these different things that that traders do because they don’t even know what kind of trader they actually are already. And so, yes, figuring out what you are doing first is the key step. Because then you can say, I am trading like a day trader but I sure stink at it. Maybe I don’t want to be a day trader. Okay fine, that is what I am now though, what kind of trader do I want to be?

That is actually where your work starts because you know who you are, you know what you are and you are not really happy with it, you want to change your behavior. And so when you work at it from that angle you are working at it from an objective place not a subjective place. You are looking at what you are doing, you are measuring it and you are saying, I need to change those measurements. Do you know what I am talking about?

Scott: Yeah, I think you are really talking about time frame. And if you want to hold stocks longer, if you want to be part of that overall trend, you have got to get your eyes off of 1-minute charts. You shouldn’t care about what’s happening on the 1-minute chart, you should zoom out. And so I think what you are saying is, dependent on what type of trader you want to be, a position trader, a swing trader, a day trader, in my opinion, every one of those has a certain set of time frames in kind of a universe that you live in. And then you don’t worry about what happens outside of that universe because you need some sort of framework to accomplish what you are trying to do.

Dan: Yeah, that’s right. You know, a couple of things, first of all, Dave Ryan is a friend of mine, he was really in on the ground floor with Bill O’Neil at IBD. He ran money. I think he was US Investing Championship winner, I believe 3 times, so Dave knows what the heck he is talking about. And by the way, he is also the nicest guy you will ever meet. So, so much for needing a killer instinct in order to trade. If that was the case Dave would never make a dime

One of the things that he said, which really was kind of news to me, he said he never saw Bill look at a daily chart. He said, all Bill looked at was a weekly chart and he had his methods with respect to stock selection, position size, entry, stop because he did use stops. People say stops don’t work. No, you just don’t know how to use them, dude. And then he also knew when to exit and his exiting was always kind of in scales. Very rarely did he just punch, pull the ripcord and get out of all of it. But what Dave was talking about was, Bill O’Neil didn’t care what the oscillations in the stock were doing. Certainly intraday, but he didn’t even really care about the daily chart, all he cared about was the overall trend. Because that was a good reflection of what the institutions are doing.

I know you are on MarketSmith, along with me, which is an excellent resource. I remember when WONDA was out, that was William O’Neil’s institutional product. It’s not available anymore, I actually visited Dave ages ago, I think it was like 2000, whenever it was, 2003, and in his office, when he was running a hedge fund in Santa Monica, and he had this big cool thing on, with these charts, they were blue and pink, which I was going like, what are you doing there? They had all of this data on it and I said, what was that? Because I was executing some trades for him, not planning them. But I said, what’s that? And he said that’s WONDA, and he showed me some things, and so that all went away.

I asked them, probably a year ago, whatever happened to WONDA because that would surely be something that would interest me? And they said, that’s what MarketSmith became, that’s what WONDA became was MarketSmith. We made a couple of changes, there are one or two things that aren’t in there but we are not even doing WONDA anymore, it’s just all MarketSmith. We are really digressing here, but that is really a cool thing about trading, about investing, essentially about the world and where we are now in technology. So many things are becoming commoditized. What used to be super, super expensive things, very limited in distribution like WONDA, they figure out a way to do differently and suddenly it’s available to the masses.

Scott: I think you’re right, technology causes deflation, right? You see it everywhere.

Dan: And technology is really disruptive because, think about it, even if the product doesn’t change but you find a way to make it accessible, not to 1,000 people but to 1,000,000 people, again, the product is completely the same but you found a way to deliver it. That’s the difference between Blockbuster and Netflix. When Netflix came on the market, that was certainly the week that Blockbuster, which I don’t even think is publicly traded now, if it is it shouldn’t be. That was the very week and maybe even the day that Blockbuster peaked. And why was it? All Netflix was doing was delivering movies. Well, yes, they were sending them to you. And then later they were online.

Meanwhile, Blockbuster, you had to go there, rent the DVD, stand in a long line, and it seems to me like every long line I’m in, whether it’s at the supermarket or Blockbuster the people in front of me are having big issues. They are there, I want to return this, I want to do that and can I change my account. And I just want to rent this DVD on Caddyshack.

So anyway, what I am saying is, everything changes, everything changes. When I started Stock Market Mentor back in 2005 I had a website on ColdFusion, video delivery was brutally bad and hard, I started with 22 members, now I have multitudes of that. I’ve gotten better, who wouldn’t after almost 20-years? It’s been the availability of technology to get my stuff spread out to a wider group. But this is the point on that, just by virtue of the numbers, the multiples of people that you have, your product is going to change, it is going to change just by the fact that more and more people are looking at it, you are going to make changes based on the things that you are learning from that.

But let me bring this all back around, this is really not that true, not true when it comes to trading and this is why; because there is only certain things that we can control. Sadly, a lot of times they are the wrong things but there are only certain things we can control. And think about this Scott, we can’t control what the market does. We can’t control what the Fed does, we can’t control the political or even the economic environment. There are so many things, geopolitics, even the development of technology, we don’t know what the heck Zoom ( VIE: ZOOM ) is going to do. We don’t know what Microsoft ( NASDAQ: MSFT ) or Google ( NASDAQ: GOOG ) or any of these things are going to do, we just simply don’t know that stuff.

So we have to say, alright, I am going to forget about the uncontrollables, don’t care about them. All I care about is the controllables. And so what we can control in our trading is only one thing, that is our actions, our decisions. Just kind of tell me what you are thinking about this list. There are maybe 5 things that you can control. You can control stock selection, what is your trade, what you decide, I am going to buy this stock? You can control the number of shares you are buying, which is how much money are you going to put into that trade? You can control where you are going to put your stop. You can control where your exit is going to be. And you can control whether you want to add more, whether you want to reduce it, and things like that. There are all these different aspects of each of these basic elements. Stock selection, entry positions, size, stop, and exit. There are all these different aspects of those. And so they kind of have subsets of what you can control but that is really it, don’t you think?

Scott: I think you are right. And I go back to time frame as well because I believe that every trade needs some sort of time frame mindset. Like you and I are both long in crypto as a long-duration asset, holding it for multiple years.

Dan: I should have sold a couple months ago.

Scott: I know, I sold some speculative stuff. And so yes it’s frustrating to see that volatility, which by the way, goes both ways. But if you are setting your mindset up for, okay, I don’t really care what happens in the short-term because I am looking long-term, then you have to trade that in a specific way, where if you are day trading something you are going to look at different time frames. And your actions, your entries, your exit, all the things you are talking about are going to be much different.

Dan: Yeah, and the thing is, with respect of Bitcoin, crypto, because this is an obvious example. Everybody knows, within a certain period of time, a year or two or whatever it has been, it’s gone from 20 or 30 thousand, we can go further back, and why didn’t I buy Bitcoin when it was $5.00? But anyway, you look over the last couple of years, and what I am getting to here is, what’s the type of trader, and what are the factors that you are looking at? If you look at this and say when I was kind of buying it all the way up, not where it is now but I think I stopped at 30 thousand, maybe 36 thousand, which isn’t too far from where it is right now, but this was my process.

This was because my wife was beating me up for doing the wrong thing at the wrong time. She is a lot smarter than I am and much better looking. But anyway, we talked about, what the heck are we doing with Bitcoin? And we both decided that we were just going to be long-term holders, Hodlers if you call it, right? Isn’t that for hold on for dear life? Something like that. But anyway, we decided that we didn’t care what Bitcoin was doing next week, next month, even next year. We put a certain amount of money in it and it was not an insignificant amount of money but it was just a small percentage of our net worth because you want to kind of spread your stuff a little bit but don’t get nuts on it.

And so we put an amount in there to where we decided, you know what? If we lose all of it we are not going to miss any meals. And so we made a decision that we care more about what it is going to be doing in 2030 than 2020. And this is one of the reasons why I looked at it when is was up to 66 or 67 thousand, isn’t that where it peaked?

Scott: Around 69, yeah..

Dan: Yes, and so I was talking to my wife about it at that time, about maybe we should sell a little bit just to kind of take some profits and maybe it will pull back. But then we really started looking at the math, which is what most people don’t do. We are long-term holders in Bitcoin and we didn’t have some to really be trading.

But I live in the “People’s Republic of California”. They want a lot of money from me and it’s not even deductible on my Federal taxes. I have lived in California a long time and our taxes have always been deductible from the Federal taxes, which basically is a socialist thing. I like the people in Nevada, Tennessee, Texas paying part of my state taxes, thank you very much. Well, they even took that away, so now every year I am paying at least 50, more like 60 percent of my income to taxes. And so, I am not griping about that, that is for another time. But I am just saying, that’s the reality of it, that’s the reality of trading.

Scott: You don’t want that tax event to happen if you start trading, especially a high-dollar asset, right?

Dan: You think about this, let’s say I bought something at 30, I’m selling at 70, so I made 40 thousand bucks, which is more than 100 percent, 120-130 percent return on my money. Okay, fine. So I am paying 60 percent of that in taxes, which means I didn’t make all that money. The stock ran clear up to heaven and I took profits and it’s like I might as well have sold it way down below and I would have made the same kind of money if it was tax-free.

The point is, if you need to sell something to get out, then fine, go ahead and do that. Taxes don’t matter, survival does. But most of the time, and this is definitely the case with retail traders, they look at a stock and they go, I have got to take profits in this. And at the end of the year, they are looking at their account return and they made 50, 60, 70, 100 percent on their account, that’s really great. And then when they are paying their taxes they are wondering why they are so high. And then they realize, well crap, I have been taking all the risk so Uncle Sam can get all the reward.

Institutions don’t do that. I know because we have some of our money being managed by a large institution and we get letters on a fairly frequent basis saying, we would like to move this to this or do this or that because the tax consequences are very, very minimal. They are always thinking about taxes and that is one of the big differences between retail traders and large money managers, they have to think about taxes, we don’t have to.

And so like with you Scott, you are a short-term trader, you’re a swing trader. I like to trade a little bit longer because I’m almost 64 years old, and frankly, I’m tired by all the zigzagging and zigzag. I am just kind of looking for that. And so you don’t really have any tax issues. You shouldn’t even care whether it’s December 31, January 1, it doesn’t matter. I really don’t either in my trading accounts. But these are the types of things that you have to look at.

I know we have had a huge digression out to left field, but have to look at this type of thing and say, do taxes matter in my trading? If they do you are a totally different type of trader and that is the last factor that you have to consider because you can control how much taxes you pay just by virtue of whether you are going to take income or not.

Scott: I think that’s a really good point. And something that is serious, that a lot of people who are looking on the outside, the glamour of day trading and all this stuff, they don’t think about that. They don’t think about that tax event that they will get from selling that option that went up 5,000 percent or whatever it is. So I think that is really important.

Also, I think that account selection is important, so I do a lot of trading in a retirement account, where taxes are not an issue. So I can swing trade in that account and it doesn’t matter. So knowing what kind of account you want to set up can help you determine, okay, this is my long-term account for my long-term trading, this is my short-term account for my short-term trading, and this is my day trading account where I am just going to have a little fun.

Dan: That all makes sense. And one other thing, if you are doing it that way, it also forces you to keep track of exactly what you are doing. Because if you are trading differently in your retirement account then you need to look at that account and say, what the heck am I doing here? Am I doing this the right way or do I have “style drift,” as they say? And that is easy to have when you have different accounts. So you are essentially not specializing, you are not a specialist trading one account in a certain way. You are a little bit more of a generalist, you’re a little bit of a jack of all trades. You have got to kind of shift around, okay, I am doing this in this account and this in this account.

And one other thing that you got me thinking about is, what about the free commissions? Everybody is trading commission-free. And so this is what I would challenge anybody to do, you are trading commission-free right now so buy, sell, the price is the price and that’s that. And so at the end of the year, let’s say you made 30 percent or 100 percent, I don’t know, pick your number. Let’s say you made 100 percent and this is like the third year in a row that you have made 100 percent on your account. But you are looking at what the actual profit or loss on each trade was. But factor in those goofy $7.00 little commissions on the entry and on the exit back a couple of years ago when you were paying that.

Now, how much of your trading profits did that eat into? And it’s a big number, I can tell you this from personal experience. There were 2-years in a row, this is several years ago, when I actually lost money for the year, even though my batting average was pretty good on my wins versus my losses. And the percent gain that I made versus the percent loss. This is ultimately what it looked like, I was really, really hyperactive. It was, oh gosh, I made 3.5 percent on this, I am going to go ahead and take that short-term trade. And then like, oh, the stock goes down 2 percent, oh, not going to take a big loss, I’m out of there.

And then I go into the next one, I’m trading like a shark swimming through a bunch of chum or whatever. It is just like every shiny object I’m going for. So then I looked at the amount of the commissions that I paid and I actually would have done better if I had just gone golfing or something because commissions were that big of a deal. But if you just look at that and say, oh well, the brokers are screwing me, and stuff like that. No, that was actually a real blessing for me, though it didn’t feel like it at the time because it showed me, it taught me, I couldn’t help it, it smacked me in the face, that I was trading too much. And I was not taking enough from each trade and so I didn’t have much wiggle room.

If you are getting charged $15.00 for a round trip and your commissions are actually eating into your profits, well, think about the math, what are you doing? You are making money for the broker, I never got a thank you card from TD Ameritrade, not one, and it kind of ticks me off. But anyway, those are the types of things that you have to look at if you want to trade profitably consistently.

But I want to get into something else, and that is the role that discipline plays in this. All of these things that we have been talking about, tax issues, what type of trader are you going to be, where’s you exit, where is your entry, what’s your position size, your stop, all of that stuff. Let’s say you have all of that stuff dialed down. Here’s the little secret, well, it’s really not a secret, there’s a gob of trading books out there, frankly most of them aren’t very good but some of them are really, really good, like really good.

Anything that William O’Neil ever wrote, that’s gold (Scott showed his copy). I could go over there and get mine too, frankly. But Bill O’Neil’s stuff is really good. If you want to take one book and learn everything there is to know about it and be really, really good at what you are doing, you look at that book you just showed, “How to Make Money in Stocks”. Another guy who has written some really awesome books is Mark Minervini, he’s a friend of mine and I like him very much.

Scott: I’ve got that one too.

Dan: That’s an old picture by the way. I like him very much. I respect him immensely as a person but certainly as a trader. When it comes to trading Mark is a little bit like, I probably could come up with a better term but, a robot because he has certain things that he looks at and if he doesn’t see them he doesn’t trade them. I have gone to several of his workshops, we are not going to turn this into a Mark Minervini fanboy club but he has certain entries he looks at. He has certain ways that he selects stocks and all that kind of stuff. He is the most disciplined trader that I have personally ever known, very, very disciplined. And that is really where it gets down to, what are you doing here?

You can have your process for all of these things that we have been talking about but if you don’t have the discipline to stick to that process, then your process is actually meaningless. In fact, it is actually worse than meaningless. It’s a negative thing and I will tell you why, because you are trading under the illusion that you know what you are doing, and you don’t. You know what you should be doing, which is different than actually knowing what you are doing.

And so if you don’t have the discipline to follow the rules that you have created and that you know work, then over time you are going to get so frustrated by trading. And your illusion is going to be, oh crap, I have this process, I have this plan. Why aren’t I making any money? Because every single trade that you are making is an exception. Like well, I know this isn’t a perfect setup but, you know what? I’ll take a shot. Or well, I know I should be selling this now, but do you know what? I am just going to hold it for a bigger move because I really like the company. So you do stupid things like that. That’s not calling an audible, that is just not having any discipline.

Again, if you look at dieting, you have the best diet in the world, I am going to cut out my simple carbs. I am going to eat good protein, complex carbs, plenty of vegetables, high enough fat and I know that is going to work for me right after I finish this pint of Haagen-Dazs ice cream (Scott laughing). You know what? I have got to finish that one bag of Doritos up there. And so that is just a function of discipline, it is just like, you have a plan, it might even be a good plan but if you have no execution you are kind of done.

And so one of the things that, in fact, it is funny you mentioned at the outset, that taking the next step, I am teaching a course in March, I forget the exact date, you can check the website, on all of this kind of stuff, and I am calling it “The Next Step”. This isn’t a promo for that but I will tell you in a nutshell what I am going to be talking about. I am showing trading process, stock selections, entries, position size, stops, exits, and all the little nuances of each of those.

I have paid over 100 thousand bucks, more than that, in courses throughout the years. I don’t know how many books I have read but it has been more than one or two. And one thing that I don’t ever see taught or discussed is, here’s your process. Now, the most important thing is, let’s talk about how you have the discipline to continue executing this process.

What it really gets down to, I just thought about this, I am a huge Kevin Costner fan and one of my favorite movies is “Game Day” and I will tell you exactly why that resonated with me because they are showing this stupid yellow Post-it throughout the movie while this guy runs around; first draft pick and we are going to do this and Beau Callahan and this and that. The whole movie was that and then right at the end, he picks this Vontae Mack guy. And during the climax of the movie, don’t want to spoil the movie for you though, he throws down that Post-it and the coach opens it up and it goes, Vontae Mack, no matter what.

And so what this guy did was, he had his plan, he had his plan all worked out. He knew exactly what he was going to do and then in the heat of the moment, he called an audible. He was doing all kinds of this stuff. The whole movie was made around him doing crap that he shouldn’t have been doing. But then at the very end, his discipline won over and he picked Vontae Mack. So one of the things that I have taught in various workshops is, I just show a picture of that, and then I explain, hey man, if you don’t have a plan and you don’t have the discipline to it, you might as well throw the Post-it away.

And so one of the things that I am going to be talking about in that course is techniques, specific techniques that people can be employing in order to keep their discipline. In fact, to a point where you can’t deviate from your discipline unless you first look in the mirror and say, you know what? I am really an idiot here. I feel like losing money. I want to lose money, I love losing money and this is a great opportunity for me to throw away my discipline and do that. It will be that obvious. And so to me the discipline is the big thing and I want to talk about that with you a little bit and see some of the things that you deal with, with respect to discipline. Remember that movie “Moneyball”? I don’t know if you ever saw it.

Scott: Yes.

Dan: The Oakland A’s and Billy Beane. And one of the things, you have got to think about this with trading, one of the things that Brad Pitt’s character said in the movie was, man I hate losing. And then he said, I hate losing more than I love winning, I hate losing. And so I thought about that, and me too, I hate losing, just in life I hate losing. I actually expect to win on something, I expect to accomplish something. So when I do it is gratifying but it’s not like fist-pumping. It’s like, yes, I accomplished that, that’s what I expected. But when don’t I feel like an idiot.

Well, think about this in your trading. Think about the pleasure you take on a trade that is profitable. And then think about the pain that you feel on the trade that is going against you. Now, I know you are a lot like me, we talked about it. You don’t tolerate losses, you will take them before they get painful, right?

Scott: Oh yeah, 100 percent. I have a system for my stop losses and I know where I’m out on every trade.

Dan: Well, that is in your course, that’s in your course.

Scott: Yeah, that’s right.

Dan: Yeah, that’s one of the things that you taught in your course several months ago.

Scott: The one thing that you are really getting at Dan because people can have or say they can have discipline when the market is doing this (upward hand motion). As soon as the market does this, that discipline seems to go out the window. What do you think are ways that people can kind of stop themselves from making money here (upward hand motion), and giving it all back here (downward hand motion).

Dan: Well, yeah, I definitely have some thoughts on that. But what you are saying, I will put an exclamation point on what you just said. That is is the biggest issue that the average trader faces, during a certain kind of market they are doing really well. Typically, on what we are talking about here, trading the trend. The market is going up, buy anything. Buy dogcrap.com, whatever it is, and buy it because the market is going up and you are a genius.

Sure if you had bought something else you would be making more money, but your trades are working. Wow, you are really getting good at this stuff. And then the market changes direction, you don’t adapt and so you wind up giving back all or even more of the money that you paid. And by the time the market changes back to that easy market where you made money before you have a lot less money. You have no incentive to trade, you are just kind of done. Or you look back and this has definitely happened to me.

I was never trained on Wall Street, which I am really happy about. I have made every mistake there is to make and many of them many times. But if you find yourself where your account is doing really, really well and then you lose a lot of money. And then your account does really, really well again, and then you lose a lot of money. You do that a few times and what you really are is just a channeling stock. And you are wondering at the period of time, I have been making so much money on this and that, yeah, I lost some money here but then I have had this really good thing here. Why is my account balance the same? It is because of what you are just talking about, where you make money in one kind of market and then don’t stop what you are doing, don’t adapt when the market changes.

Scott: Coming back to your course here. That’s what having a process is all about. And kind of what you are talking about Mark Minervini. Mark’s book is his process, it is just like, this is how I trade and I don’t do anything else. And so that really, in my opinion, is what separates a consistent trader from someone who, as you will often say, is just playing the market, I am playing the market right now. But it works when the market is easy and the market will bail you out for buying the dip randomly but sometimes it doesn’t and then that is where those big losses can happen, those unexpected losses can happen.

Dan: Yeah, you kind of got me thinking about something. And this, again, has happened to me many times, not anymore though. You put together a string of good trades, you got good money. Maybe your account is up 10 percent, in a relatively short period of time and you are doing well. And then this one trade that you put on is a little bit bigger, a little bit bigger than your typical trade. But you were okay with that because you really had a feeling about this and you were on a hot streak.

And so of course those are the trades that never work out. So the trade goes against you but you are still feeling pretty saucy and you are going like, I know this is going to turnaround so you add on to that trade. And you don’t sell because now you are at a point where, well, I can’t take this loss because my account sucks right now. I lost a lot of money that I made on my previous 8 trades or 18 trades so I can’t afford to sell this now.

Okay, that’s the cardinal sin, I can’t afford to sell this stock. If that is your thought process you should be thinking, I can’t afford not to sell this stock. And so you take that one big loss and it wipes out your last 15 gains. And was it the stock? No. Was it your stock selection? No. We can go through the whole list but what it came down to was you having that one thing where you lost your discipline that one time. And where we lose the discipline that one time is on a bigger trade.

This is the way I look at it, first of all, why are you trading? Write it down but think about it first, oh, to make money. Are you really? Maybe that’s it, maybe you are trading just to make money but maybe you are trading because you love the market. Maybe you are trading because you love the action. Maybe you are trading because they all wear masks in Vegas right now. You go to the casino and everybody is even smoking through a mask and you don’t want to go there and so you just stay at home and trade online and gamble. I actually knew a guy who said, I don’t like going to Vegas anymore so I just day trade. He doesn’t day trade anymore.

Scott: 2020 was a great year for that.

Dan: Aw man, it was awesome, it was awesome. You know so was 1999, that’s when a lot of geniuses were made. But the point is, you have to know why you are trading, write it down, think about it. Am I trading to make money? Am I trading because I love the market but I don’t know what the hell I am doing? Am I trading for the action? Am I trading out of boredom? And by the way, that can be an instant deal right now. Why am I making this trade? Is it a good trade or am I bored and looking for something to do? Am I saying, this meets my process, meets my entry criteria so I am going to buy this stock?

But on the other hand, if you find yourself going, well, I’ll take a shot. I don’t know if this is going to work or not but I will take a shot. Okay, that’s just discipline. You are not being stupid or anything you are just being undisciplined. So there are any number of ways that your lack of discipline will kill you. And the application of your discipline will make you more money than you ever thought possible if you are just very, very rigid in it.

And to get back to Mark, that’s one of the things that he does, he is really rigid. I have seen people ask him about certain stocks, and sometimes I have the same exact statement, they will ask him about some certain stock and he will go like, well, hey, go ahead, you might make money on that but that is not my trade. He just goes, yeah, so Robin Hood is down 80 percent since it was IPO’d, he is not going to say, well I will buy it on the bounce. He is going to say, that’s not my trade.

And so what it really gets down to is discipline and fidelity to your plan. Adhering to the plan, the process that you have again and again. Because then you get better at it by doing the same thing again and again and again you get better at it but only if you are doing it the same way. You hear that statement, practice makes perfect. Well, I can tell you, that’s not true because there are a lot of things throughout my years that I have practiced because I like doing stuff.

I love playing the guitar, obviously, other things that I like. And I like to play so I will just play them. But am I practicing? No, because I am just playing them. I learned the solo to “Stairway to Heaven”, which is actually really hard especially for a guy like me who is actually a singer who just likes guitars. But I learned it by taking it 4 bars at a time and doing it over and over and over and over again and then going to the next 4 bars over and over and over again. If I missed a note I would start again. It got to a point where my wife kept shutting my door saying, you know I will leave you alone with this (Scott laughing).

What we are getting at is, it is not practice that makes perfect, it’s perfect practice, doing the same thing every time. And if you do the same thing every time and it’s the right thing, now you are getting really good at it.

Scott: I think that’s really good.

Dan: Do you know what I mean? That’s really what you did in your course, isn’t it?

Scott: Well, that is how I developed my process. I determined what my time frame was. I then picked a process and then have the discipline to stick with it. And I think that is a great way to wrap up this session here, with a checklist for people. So pick your time frame. What kind of trader do you want to be? Do you want to be looking at the screens all day long? If the answer is yes, then okay, maybe you want to be a day trader. If you want to, as you mentioned, talk about Bill O’Neil, if you really only kind of want to be passive look at a weekly chart and then determine a process for your entries. What is your trigger for getting into a stock? And then how do you define your risk after you have entered that stock or before you even put the trade on?

And then to your point, have the discipline to actually stick to that plan because it is easy when it’s working. But when the market becomes a little more challenging, that is when we can kind of throw our discipline out the window and just be a little more Lucy Goosey because in the past the market has always bailed us out. But when the market changes you either have to change with it or kind of, as you said before, be on the sidelines and just say, you know what? This is not my trade.

Dan: What it really comes down to, with respect to what you said about your class, I was there with you on that and I was really, really impressed and pleased to see that you were saying, hey man, this isn’t a be-all-end-all of trading. It is just my process for my one specific way to trade and then you taught the whole thing. Remember that commercial, be like Mike? I think that was Michael Jordan if I am not mistaken, but be like Mike. Well, what you taught people is, be like Scott. And so if they just execute that process again and again they are going to do really well at it.

So we have probably kind of worn this topic out but the whole idea is this, figure out what you like to do in trading. Figure out what you are good at and then develop a plan for doing that. But at the same time that you are doing that you have to have some self-awareness, which is very difficult to have. Self-awareness is incredibly difficult to have particularly when it comes to trading. And the reason is that we are looking at ourselves, trying to figure out what the heck makes us tick. And so you look at yourself through this wonderful rosey filter, where you see yourself as being awesome.

Or on the other hand, I suck and you don’t have an objective view of yourself. So it is really, really important for you to get that. And once you get that, once you get that self-awareness, you have self-awareness applied to discipline. And discipline applied to a certain plan that you have developed or learned. Your strategy or my strategy or somebody else’s strategy. You have the discipline to execute that plan. At that point you can’t help to succeed, it is only really a matter of time.

And when you get to that point that we are talking about here, here’s the thing, getting to that point can be long, it can be arduous, it can be hard. It can have a lot of stops and starts. A lot of times that you fall down, but then you always have to get up and keep going. But what you are going to find is, you are going to get to a point where you are not only competent but are unconsciously competent. Meaning you are so consistent and disciplined at executing your plan that you are not even aware of your discipline because it is just something you do.

I brush my teeth every night before I go to bed. I am not disciplined it is just something I do. And so you want to get your trading to that point. But you can have all the best plans. You have got to have the best mentors, all of that stuff in the world. But if you don’t have the discipline to execute what you know you are not going to be executing what you know, You are just going to be flopping around trying to figure out what’s going on.

Scott: And just like driving a car. When you first drive a car you are thinking about where exactly should my hands go? I have to stay within the lines and then eventually it is just one arm, arm out the window because you are unconsciously doing the things that you had to think about so hard when you first started. So I think that is a great line, unconscious competence.

Dan: Here’s the thing, one of the things that I do, it’s a great way to teach just about anything, there are four stages of competency, there is actually the fifth stage but that is for another time. The four stages of competency, it is a really easy concept to grasp, this is where every trader starts. Unconscious incompetence, meaning you don’t even know what you don’t know. You suck and you don’t even know that you suck or you don’t know why, you are just horrible. And then you start learning some things and these are things that people get from what you and I do. You start learning some things and as time goes on you learn more and more things that you do wrong. And you are going like, I don’t know what I am doing even trading. I don’t know this, I don’t know how to set stops, I don’t know how this process works, and all that.

And then at that point, you have a decision to make, do you want to quit or do you say, well, I need to learn all this stuff so I can be competent in my trading. And that takes you to the conscious competency part, where you do know what you are doing. But that discipline is really important because you are looking at your discipline, you are saying I know what I am doing. And most of the time you do the right thing. Most of the time you do but every once in a while you slip on a banana peel or something and then you start over again. So you are competent, you are a good trader and you know you are. You know what you are doing and you know why you are doing it. But then after you do it for a while you are not even thinking about it you are just executing it.

To take your car analogy, my wife is from a different part of the country where it is not quite so jammed packed with cars. I have been driving up and down the 405 freeway for 45 years. And so a lot of times we will be driving and it can be kind of heavy traffic and I will speed up a little bit. And it turns out the reason I sped up was that the car beside me I could tell didn’t see me and so I wanted to get in front of them before he swerved into me because this is what these idiots do out here. They text, they drive, they talk to their neighbor and whatever else, fiddle with the radio, it’s brutal out here.

And then there are other times when somebody will be kind of in front of me in a different lane and I will slow down just a little bit just in time to have the guy miss me who was going to change lanes into mine. There have been so many times when Jen has said, wow, you are such a good driver. How did you know that was going to happen? And I am going, I don’t know, I could just tell, the body language or the car, whatever it was but I just kind of knew that.

The point is, at this point after 45, 47 years of driving I would like to think that I am at the unconscious competent part. Where you just kind of know what you are doing. So we want to get out trading to that. That was a long analogy but it all comes down to instinct when you really think about it. But when you are new to trading you don’t have instincts, you just have feelings. It is only after you do enough work and have enough experience, look at enough charts, make a bunch of good decisions and bad decisions will your instincts take over. And all that is the application of your subconscious knowledge.

And I will leave you with this, I was listening to a radio interview many, many years ago of Huey Lewis. He shared this thing about, he was at a pro-am tournament with some pro and he was not playing realyl well. And so one time he really shanked one into the jungle. He got so upset he through his club and his partner looked at him and he goes, what are you so mad about, what’s going on, why are you so upset? And he goes, oh, I am just really mad because I am playing so bad. And the guy looked at him and he goes, you are not good enough to get mad.

And you think about that and it’s really true. If you practice something all the time then you are entitled to get a little upset if things are going wrong. But if all you are doing is slinging stocks around and doing this and that and the other thing with no rhyme or reason, you are not good enough to get upset when you lose money. You just have to say, well, I like losing money or I don’t, and then make a decision after that.

Scott: I think that that is really, really good stuff, Dan. You know It definitely is a mindset for sure. You know I recognize something in myself a few years ago, and then we will end on this.

Dan: Didn’t we say that 10-minutes ago?

Scott: I know, I know, we could talk forever, I love your stories. I recognize that every time I started shopping for a nicer car than the one that I currently have, that is exactly when the top was of any trade that I was in because I was making good money and I thought, man, maybe I will get a new car out of this. And it was consistent, every time. I am on the BMW website…

Dan: I was going to ask you, did your BMW hunt cause the peak in Bitcoin?

Scott: But that was a mindset thing, where I was unconscious of the fact that the market was getting to an extended point. It was happening, I didn’t recognize it at the time but then over the years you kind of learn yourself, and learn that instinct, kind of what you are saying. That is really all good stuff. I know you will be going over a lot of this in March with your Next Step program.

Dan: Yeah, yeah I will. I will be spending a lot of time on this and giving people specific things. Frankly, not just the kind of stuff that we are talking about here, where you kind of get the general gist. But it’s more like, do this. Number 2, do this. Number 3, that kind of thing. There is kind of a formula to it. So what I want to do in the future is, with you I’m talking about is, I want to talk about other aspects of trading away from the discipline, but the mental aspect of it is big.

Like you were just mentioning about looking for a car, that’s the top. It could be the same thing like you’re looking for a bomb shelter, well that’s the bottom. There are a lot of things in the charts that you can look at. And I have said this many times, many times, when I look at a chart I don’t see price action, I do obviously, but what I am really looking at the chart for is what is the crowd doing right now? What are the retail guys doing because they are always last to the party and last to leave and they don’t even get the dregs in the keg. They just get the broom and have to clean up.

So you look at charts, you look at the way a stock is trading relative to the news and that tells you what the crowd is doing. It tells you what the institutions are doing. That’s the kind of knowledge that if you have it you can make really good money and not make really bad decisions because you get it.

All you are trying to do when it really gets right down to it because our market and trillions of accounts trade our financial market, so you think about that, what are you trying to do? You are trying to figure out what the mob is doing. It’s not like, what’s Cramer say, screw Cramer, screw me, screw anybody, not you though.

The point is, you are not trying to figure out what one guy’s opinion is. It really doesn’t matter. What you are trying to figure out is, what the crowd is thinking? What are the institutions thinking? Those are the smart folks in the crowd. If you can get a handle on that, now you’ve got some powerful stuff that you can use in your own trading because all you want is to hop on board and let the wind be at your back. And that is what the charts allow you to do.

I will ask people all the time, hey what do you think about this? What do you think about that? Well, let’s look at the chart and see what that says. That’s a simple way of saying, let’s look at the chart and figure out what is really going on to make the chart. The chart doesn’t make the trade, the trade makes the chart.

Scott: Nice Dan, I really appreciate your time and all of this, and I look forward to more conversations like this. This is so much fun and I recommend people check out your Next Step program information on the website at www.stockmarketmentor.com.

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One comment

  1. avatar Tregnier says:

    Thank you Dan and Scott.
    The part of the discussion that resonated with me the most was when I lost my discipline which caused a single bigger loss than usual but overall I have been doing well. I think the discipline model applies to all aspects of life. That one time when you decide “what the heck, I have a hunch even though the chart and market conditions are not within my practice”. It usually ends in a bigger than acceptable loss. Very rarely, you get lucky, but must realize, that was gambling if you did get lucky. I don’t like that feeling either. Very good discussion from the both of you!

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