One of the most talked about traits that traders need is disciple. Discipline is a quality that can be created by the individual internally, but can also be fostered by an external source. All traders will benefit from increased discipline, as being able to stick to a profitable strategy is what will allow them to be successful over the long term.
Also, being disciplined in following a particular method of trading will allow the trader to know when a method of trading is or isn't working. Every investor must follow their specific trading strategy rather than just speculating without a solid basis. If a trader lacks discipline and consistently flip-flops between methods, it is very hard to isolate which methods are successful and which aren't.
This is where the "trading referee" comes in. The referee is an external entity that forces us to comply with our methods. This makes us more accountable to our own system, and does not require the hard internal work which may be needed in order to change our normal personality. (Do-it-yourself trading can be very rewarding - both psychologically and for your wallet. For more information, see Create Your Own Trading Strategy.)
What is a Trading Referee?
It can be anyone in our life whom we trust and whom will hold us accountable for our actions. This person needs to be someone who will not accept excuses for us not following the determined approach. In other words, a referee cannot be someone who is a push over, will be biased or always agree with you, or someone who is not responsible enough to check on your trading. Essentially, the referee serves as system of checks and balances for our strategy.
The referee's aim is to make sure that you, the trader, are following your trading plan. Your trading plan should be a method of trading which is tested, consistent and proven to be profitable over the long run. Therefore, it is a referee's goal to make you follow that system, thus helping ensure your long-term profitability. It is a requirement that the person be able to see you trade (or have access to your trading records). Going through results should be done together; this again will require trust on the part of the trader.
A referee, whether it is a friend, a spouse, colleague or girlfriend/boyfriend, will make you answer for the decisions you are making. They will force to answer why you are taking certain actions, and how those actions relate to your trading plan. When you stop following your trading plan under your own will, this person is there to give you support and make sure that you do not deviate from the initial goal. After all, this is not about the trader proving he or she is right, it is about being profitable. (From picking the right type of stock to setting stop-losses, learn how to trade wisely. Read, Day Trading Strategies For Beginners.)
"Create" Your Trading Referee
It is important that this individual understands capital markets and the basics of investing. As well, your trading referee will need to know about your methods for trading. Here are some steps to follow to make sure your referee will actually make you follow through with your trading plan. (A successful trading referee must be familiar with concepts such as risk. To learn more, refer to Matching Investing Risk Tolerance To Personality.)
- Approach or ask someone you think will be a suitable candidate. This should be someone you see regularly, preferably while you are trading, or who you can sit down with on a regular basis to go over your trades. You can also serve as the referee for your overseer - such a method ensures constant interaction and proper process evaluation.
- Make sure that person knows that it is imperative for him to question you on your trades and to ask why certain actions are being taken. This makes another person feel responsible, therefore it does help if this person has an interest in your success.
- Fill in the referee on your trading method and why it works. Simplify your methods for them so that they can see how the method works, the logic behind it and the sequence of events that must unfold for you to enter, set stops, take profit and then exit.
- Take a proactive approach and share your trading time with your referee. Having the person review your trades with you afterwards is more reactive and, while effective, does not prevent the deviations from the trading plan at the time they are occurring.
- Set up a rewards and punishment. Having someone look over your shoulder may be motivation enough to follow your own trading rules, but sometimes a little extra incentive may do the trick. Often, the incentive for following a plan is the money made; therefore, we need to be creative in finding ways to punish ourselves for not following the plan. One idea is that you need to give the money you make on winning trades, which were not based on your plan, to your referee. This works because you should have never been in the trade in the first place, and it takes away the incentive for making trades which are not included in your desired strategy. Be creative and come up with a structure for dealing with all contingencies.
Professional traders are forced to answer to other traders and superiors for the actions they take. This results in a much more disciplined environment. It is the responsibility of the firm (and the trader) to make sure that traders are following the methods outlined. When traders deviate, there are consequences. For individual traders, having a referee simply allows performance with the same discipline promoted in successful trading firms.
Trading is a tough game, especially when we go at it completely alone. It can be of benefit to invite someone else into our trading experience who will force us to comply with our own methods. The benefits are numerous, not the least of which is the proper execution of a profitable trading plan we took the time to research and develop. (This is a step-by-step approach to determining, achieving and maintaining optimal asset allocation. See 4 Steps To Building A Profitable Portfolio.)