Mark Thomas — Trade On Track
Discipline is often quoted as one of the cornerstones of a successful trader, but how do we get it? What importance does it really have in how well we do? In this article I’ll discuss the importance of discipline and some tricks you can use to improve your trading discipline.
Learning to trade tells us a lot about ourselves, our personalities, our strengths and weaknesses. We may discover that our self control is lacking, that we love to chase excitement at virtually any cost, that the game is more important than the outcome, that we yearn for the challenge without really caring about the end result. All these traits are destructive to our overall trading success. We might have fun along the way but we’re going to end up with no trading account.
There are a couple of foundations that we need to put in place in order to build our trading discipline:
- Have a clear idea about why we are trading. This can be formally addressed by developing a trading plan, a written document describing why we want to be traders, what we hope to achieve from it, and how we are going to go about achieving that. If you haven’t yet written a trading plan or it’s been a while since you’ve reviewed it, start working on that now – it’s an important first step
- Have a trading strategy or a number of strategies that we can have confidence in. This can be a bit of a catch-22 situation because it’s hard to build confidence in a trading system if we don’t have the discipline to execute it properly in the first place. Nevertheless, it’s important to find a strategy or develop our trading knowledge to the point that you absolutely KNOW that you can make money from the strategy, if executed correctly.Have a trading strategy or a number of strategies that we can have confidence in. This can be a bit of a catch-22 situation because it’s hard to build confidence in a trading system if we don’t have the discipline to execute it properly in the first place. Nevertheless, it’s important to find a strategy or develop our trading knowledge to the point that you absolutely KNOW that you can make money from the strategy, if executed correctly.
Once you know why you’re trading, what you hope to achieve from it, and you have a strategy to get there – then you can start the execution phase, which is where the importance of discipline comes into play. Successful trading is about building your equity, bit by bit, in as consistent a manner as possible. Wild swings of profits followed by losses will eventually bring you down – you need to find ways to preserve your capital and build on it with relatively small amounts at a time. Without discipline, you’ll take trades based on emotion, risking way too much and ending up losing in an instant what took you weeks to build up through disciplined trading.
How do you instill discipline in your trading? I mentioned “confidence” above and this is extremely important. If you have confidence in your skills and in your system, then you know you can recover from the inevitable losses over time. You know that your system will provide you the wins if you just stick with it. Confidence generally comes with experience and with knowledge. Learn everything you can about the different phases of the markets and how they move. Learn about what drives the markets, how the bulls and the bears are constantly fighting it out and when they start to give up and let the other take some territory. Learn about support and resistance, trend lines, fibonacci levels, moving averages and other momentum indicators.
Along with confidence, you need to develop an unemotional attitude toward your trading. Know your trading rules back to front. Have the patience to wait for the right setup, the setup with the highest probability of success. Then, take and manage the trade through to exit – just following your rules, without emotion. A phrase I’ve heard which you might find useful in your trading is: “just date your trades, don’t marry them!”. In other words, don’t become too emotionally attached to any one trade.
Other emotions that tend to grip us during trading include excitement, fear and greed. A favorite saying by respected trading mentor, Dr. Van K Tharp goes along the lines of: “if you don’t find trading boring, you’re doing something wrong”. When trading, we virtually have to act like robots (something my wife says I’m great at 😉 ). A win should be treated with the same emotion as a loss. That doesn’t mean we should ignore what our results are, it just means we should analyze our results and make the necessary changes if required, without emotion.
Some tricks you might be able to use to help with your trading discipline:
- Don’t look. Yep, just like a scary movie – cover your eyes or better yet, switch off your computer screen or go and do something else whilst your trade is in play. Sometimes it’s necessary to monitor your trade, but do so at reasonable intervals: set yourself a little goal like: “I will not look at my trade for the next 30 minutes”.
- Similar to above: Place your trade before you go to bed, then when you get up in the morning, the trade will have run its course and either hit the target, or hit the stop loss.
- Become accountable for your trades. This is relevant for both demo and live accounts – you must hold yourself responsible for how you trade. The best way to do that is to track or log your trades, all your trades, properly. When you correctly track your trades, you’re building up statistical data as to how effective your trading system is. If you jump out of a trade early, you’ll be polluting your figures and spoiling all your good work to date. Do the responsible thing and let the trade play out.
- Think of the probabilities. If you’ve worked out your trading strategy properly, you’ll know the percentages of wins against losses. So, if price looks like it’s going against you, you can think to yourself that it’s just one of the losses that you’ve accounted for – nothing to be concerned about.
- Pretend to be a robot! I remember in High School when doing a woodwork class and learning to use a plane, our teacher would instruct us to act like a machine: hold the plane as straight and steady as possible and move back and forth, just like a machine would. We can do the same thing in trading. If it were a machine (or a computer program) taking the trade, would it take this one in front of us now, where price seems to be breaking up strongly, but we haven’t taken the time to analyze anything else about the trade? No, a computerized robot would do all the necessary analysis and would take the trade exactly according to its inbuilt rules.
So in summary: know why you’re trading, know how you’re going to do it, then carry out each trade in a robotic fashion – sticking as close to those rules as possible. Analyze your progress from time to time to see if you need to alter your trading system in order to produce better results. And, don’t forget to never stop learning!
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