Article Reviews, Thoughts, Trading

The Nature of Willpower and Its Application to Trading

I recently read this superb article on willpower by Eric Barker, with points from his interview with Dr. Roy Baumeister. I find it very relevant to trading, especially intraday trading.

Much of successful trading has to do with having the discipline, the willpower, to follow the trading plan. And much of a good trading plan goes counter to a human’s natural reactions to the market. Hence the greater your willpower, i.e. the better you are able to have self-control or self-regulation, the better your trading.

Below are some key points from the article and Roy Baumeister’s YouTube videos, and my thoughts on how they apply to trading.

The Nature of Willpower

  • Willpower is a limited resource that gets depleted when you use it.
    • I typically find that my trading at the early part of the session is good. I would follow my trading plan well and profits usually follows. However towards the later part of the morning, I start to make mistakes and go counter to my trading plan, that’s when my results suffer.
    • Be aware of when you have run out of juice. I find that once I start make a few consecutive trades that violate my trading plan, I recognize that my willpower has been depleted, I am not making good decisions, so I go take a break, or stop trading for the day entirely.
    • Some traders recommend not trading for more than 3 hours a day. Yes you may miss a run away market after you stop trading, but recall your experiences when the market trended very well the entire day but yet you lost money. To extract money from the markets requires willpower to make the right trading decisions. When you are not able to follow your trading plan, the probabilities favor you giving money to the markets instead, regardless of the market situation.
  • When your willpower is depleted, you feel your emotions more intensely
    • When you feel your emotions more intensely, the more you are compelled to act to escape them, which typically means violating rules in your trading plan.
    • Note that feeling your emotions more intensely is different from lacking self-control over your actions in response to those emotions.
  • There is only one source of willpower. In addition to self-control, that source is used similarly for decision-making, and the taking of initiative (pro-activeness).
    • If you are trading towards the end of your day (e.g. in the evenings), be aware that your willpower has been depleted throughout the day in all your daily activities, and that would likely impair your ability to follow your trading plan.
    • The lack of willpower impacts both your ability to follow your trading plan and your ability to make good decisions trading or otherwise.
  • Glucose is used for willpower and to fight illnesses
    • If you are sick, don’t trade. Your body wants to use the glucose to fight the illness, and that is depleting your willpower so you will make bad decisions.
    • If you are hungry, feed yourself. You are lacking the energy to exert willpower for good trading.
  • People with good self-control tend to avoid situations where they have to rely on willpower to bail them out (e.g. if they trying to quit drinking, they do not step into a bar)
    • When I enter a position far away from a logical stop loss, I need a heck of a lot of willpower to stay in the trade and resist the incredible urge to get out as the market does its dance around my entry price. I have effectively put myself in a situation where I am relying on my willpower to bail me out, and placing a huge burden on it. That not only impacts the trade-in-question, but also puts future trades in danger because it depletes scarce willpower that would be required for other trades during the rest of the day. So I focus on taking good risk-reward trades close to logical stop loss levels and avoid chasing the market.
  • Emotions is a natural mechanism that makes you reflect on your actions so that there will be a ‘tag’ in your mind that helps you adjust your behavior the next time
    • Embrace your emotions, don’t shut them off or ignore them. They are trying to communicate with you and shutting them out will only cause them to come on stronger.
    • After trading for some time, you will naturally be able to recognize or even anticipate your emotions so you avoid getting into situations which you recognize will lead to a bad emotional outcome.

Ways to Increase Willpower

  • Plan in advance and operate on the basis of habit
    • You need to have a trading plan that covers all permutations that the market can possibly throw at you. You need less willpower to follow a clearly defined plan than to try adhering to broad principles in reaction to the market.
    • Keep practicing applying your trading plan, so that you can make following the rules a habit. It is like driving, the more you do the less effort it requires progressively.
  • Motivate yourself, remind yourself of the importance of what you are doing
    • You need to remind yourself of the importance of achieving good trading results, of the importance of not throwing your hard-earned money away.
    • Use visualization techniques to picture situations where you follow your trading plan successfully. Thinking that you have lots of willpower actually makes it so.
    • Think of some trader you admire that have lots of self-control and unfazed by market movements (e.g. Ed Seykota)
  • Exercise your willpower
    • Willpower is like a muscle, the more you exert your willpower in whatever tasks, the greater your capacity for self-control.
    • You can get yourself to follow rules such as sitting up straight, opening doors with your left hand, etc.
  • Have sufficient food
    • Exercising willpower uses up glucose. Being hungry means you don’t have the energy to exert willpower.
  • Have sufficient rest
    • You can replenish your ‘willpower’ stores through sleep. Get sufficient sleep every day.



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