Investment discipline is knowing your strategy for a trade – both if it goes well and if it goes badly – and sticking to it.
Too many investors second-guess themselves. They confidently talk about exiting a position if the position trades down to particular level – while it’s on the way up. But a funny thing happens when the same position starts trading down, especially when it reaches the point where they originally claimed they would sell the position. A lot of investors will make a new set of rules and allow the position to trade to an even lower point before they sell – if they ever sell at all.
There have been volumes written about why investors do this. But the main reason, it seems, is that these same investors don’t really have a discipline. They know “why” they bought the position, but they have no idea what to do with it after they own it.
That’s one of things we mean when we talk about “having a discipline.”
One of the most important lessons investors can learn is how to understand their position from start to finish – before they enter the position in the first place. Knowing when you are going to exit the position if it is a winning trade and knowing when to exit the trade if it is a losing trade will take all the guess work out from the get go. That’s having an investment discipline.