Discipline is the most important habit when it comes to trading. But it is also the most ignored one.
We could spend plenty of time developing our system and our business plan, we could have the best system around and a well thought business plan but if we don’t have the required discipline to follow them, then they are of no help. Many traders know what they should do and when to trade but they still trade poorly because they don’t have the discipline to follow their plan. They tell themselves they won’t do it again but they still let their losses grow, keep chasing the market, etc. Sometimes they try to compensate for it by studying more trying to develop their technical analysis skills, but it won’t help, failing to get disciplined is what is holding them apart.
Discipline is all about following your rules. It is human nature to have a feeling of “rules rejection”. Most of this is because we have been trying to break them since we were kids. Don’t do this, don’t do that was all we heard, but we felt somehow comfortable doing what were not supposed to. This tendency has to stop now.
We feel discipline is so important we have split this section into several parts that specifically address how it should apply to various aspects of your trading role
Having the Discipline to Follow your System
Rules are made for everyone’s good (or so they tell us, not sure about that last speeding ticket..). Take for instance, a red light. How many times you have run through a red light? …… Anyway, the thing is that this rule was made to organize the traffic at some point; it is good for every one of us. What could happen if someone runs through a red light? Well there is a possibility that this one guy or gal crashes against other car, and the consequences of this could be fatal.
The same goes for trading, if you do not follow your system then there is a possibility that the single trade you take against your rules could have disastrous consequences, such as blowing out your trading account or losing more money than you can afford to lose.
So it is simple, are you willing to take the risk? I didn’t think so. Is it worth it to pass through a red light and have the possibility to crash against other car? Is it worth it to take a trade against your rules and have the possibility to blow out your entire trading account? No. Say it again so you believe it – NO!
These are the questions you have to ask yourself before violating your trading rules as following your rules gives you the opportunity to have a long and successful career.
You have spent plenty of time and effort creating your system and the rules that govern it. You have analyzed every aspect of your trading, the conditions that have to be met before you think to take a trade, about your trigger signal, where the stops and exits should be placed and more. You studied all this and put it together in what you call today your trading system and concluded: whenever my rules are present, there is a higher probability of success in any trade.
When you developed it, you were objective because you analyzed every single situation. On the other hand, when you are in a trade or thinking to get in the market you are far from being objective, emotional factors kick in and make you block information that was visible when you developed your system.
Taking this trade against you rules could also be your last one, because somehow you determined that the current conditions were “risky” otherwise you would have them incorporated them into your trading system.
You also determined that certain conditions had to be met in order for your system to signal a trade. These conditions tell you that the market has greater possibilities to go one way over another. In the long run probabilities will show their value. Only if you follow what you call an “edge” (trading opportunity) will you have a chance to profit consistently from the market.
Every time you follow your system signal, it adds little by little and builds your confidence in yourself and your system. There will be times that your system signals turn out to be losing trades, but remember, we have to learn to live with losses because they are going to be around forever. If you understood the concept of market uncertainty then you will be ok with losses, if you didn’t, I suggest you to go through it again.
If your system tells you to take profits at some level, do it. Most trades will reverse at that point.
If your system tells you to take a loss, do it. Most trades will keep going against you if they reach such level.
If your system signals a trade, take it. Most trades will make you money (or will put you in green at the end of the month).
If you follow your system you will make sure:
You will not overtrade
You will only take high probability trades
You will not let your losses grow larger
You will take profits consistently
Your chances of success will be greater
Of course I am taking for granted that you had the discipline to develop and test your trading system. A lot of hard work is required to trade successfully; some traders might think they have a system but only spent a few hours developing it. If you really want to succeed you need to work on your trading system and test it properly, this can take weeks or even months, but if you do it right, you will have greater chances to succeed.
Discipline to Follow your Business Plan
As you already know from the Basic Course, a business plan describes your current condition, your goals and how you are going to achieve those goals. It is a road-map that will guide you through your journey, and you need the discipline to create one and follow it rigorously. We go into more detail on this in Lesson 11.
When you created your well thought business plan you described the most important rules that will govern your trading activity.
At some point, you objectively evaluated your situation and the risks you were willing to take.
At times it might seem logical to increase the level of risks you are going to take, this usually happens after string of losing trades as an effort to recover back the loses. But what if the system you are using doesn’t fit you? So the answer and the right actions to take in order to deal with the string of loses is in your business plan. In your plan you described the maximum drawdown you will take until you review your current conditions. You also described what were the steps to follow (i.e. review your trading system and temporary stop trading).
From all possible decisions you may take, I assure you that the best ones of them are those outlined in your business plan. They will tell you what to do when you are most likely to make big mistakes and what to do on favorable conditions.
By making and following your business plan you will make sure:
Any decision you might take following your trading plan is in your best interests.
You will have a road-map that will govern your trading activities.
Discipline to stick to your MM, TM and RM Management Plan
Discipline to stick to your money management plan
Money management is a very important subject. It helps you avoid the risk of ruin and at the same time helps you boost your profits allowing them to grow geometrically. If you use a sound money management plan, then it is likely that you will be trading for the long haul.
One of the problems most traders face is that they start trading with a small account and small trading sizes; they only take conservative and smart trades signaled by the system. But as they start making money (and feel overconfident) they start breaking their money management rules as an attempt to make more money. Then they realized they are risking 3 or 4 times what they were supposed to (as their money management plan described). At that point it doesn’t take long to blow the whole trading account. Believe me, this happens more than often.
The same goes for the other side, after a streak of losing trades they size up their trading positions as an attempt to recover the losses incurred in the past. And again, it doesn’t take long to lose the whole trading account.
Every trader must follow his or her money management rules whether he or she is winning or losing. A string of losing trades is normal; we are not supposed to win every single trade.
The same happens in a string of winning trades, don’t get overexcited and think you are better than the market because it will prove you wrong.
If you do not follow your carefully crafted rules you may as well just roll the dice or visit a casino.
If you are an aggressive trader then make your money management plan accordingly, the same goes if you are a conservative trader, make your MM plan accordingly. But don’t break your rules, don’t start conservatively and finish aggressively. Of course, there is the possibility to review and change your money management plan, but if you do it, think about it, are you doing it because of the outcome of the last X number of trades?
If you follow your money management plan you will make sure:
To avoid the risk of ruin
Let your profits grow geometrically
You will be able to trade, tomorrow, the next month, and the next year.
Discipline to follow your trade and risk management plan
There will be times that averaging seems the way to go, but if you don’t include it in your plan, you will probably put yourself into unfavorable situations. This is one of the most common mistakes traders are likely to make.
You must have a plan and have the discipline to follow it. You need to know under what market conditions’ averaging down is likely to produce the best results for you. If you just do it to improve your entry level, it could be a very costly mistake.
The same goes for trailing stops, stop loss placing levels, and all other risk management techniques. You must create the rules and follow them rigorously, only this way they are likely to produce good results.
If you follow your trade and risk management plans you will make sure:
Every decision you take will be in your best interests
Every stop is placed in the right place
Every technique is going to be used to increase your profitability
Lack of discipline is one of the biggest obstacles a trader is likely to face. However, if you are able to overcome it, with patience you will become the trader you want to be. Whatever the weakness you have, it is not enough to be aware of them, you need discipline to work on them.
Advice on how to become a disciplined trader:
Have a trading journal and see what things you are doing right or wrong
Trading is a business; give it the importance it deserves
Don’t set to yourself unrealistic goals
Keep your trading rules visible at all times (i.e. by your screen)
Monitor yourself, catch yourself trying to break the rules
Understand market uncertainty
We know from personal experience, talking to other traders and firsthand with our students – at this point everyone thinks “no worries, I can be disciplined – easy!”
Let us tell you it is not; so do not take this for granted and even stick a note in the corner of your screen (that is what I did anyway) saying – FOLLOW YOUR RULES!