Discipline, or a lack of, has a great impact on trading. We believe that a lack of discipline is the biggest reason for the high failure rate in trading. So what do we mean when we say discipline and how do we acquire it in trading? The discipline that is associated with trading has two different forms:
- Discipline to stay focused and hard working.
- Discipline to stick to your trading plan.
How to Acquire The Right Mindset in Trading:
Finding discipline at the beginning of learning how to be a trader is very hard as you won’t really be trading as you will be studying. This means you don’t have the opening hours of the market to structure your day and you might find yourself studying at many different times of the day. So before you take the plunge and start to be a trader ask yourself; can you obtain and maintain the discipline to motivate yourself and to stay focused on trading and studying?
After all the studying and hard work you can finally harvest the fruits of your labor. You have now developed a system and written a trading plan and success is just around the corner. Or is it? Many traders lack the discipline to follow their own trading plan, even if it is proven profitable. This lack of discipline leads to revenge-trading and over-trading which are two very dangerous things.
Many traders feel the urge to put a trade on 1 min after being stopped out. Their conscience tells them they need to make back their loss and they need to feel they are right. This new trade is often against their trading plan, such as entry and money management. Many traders add a rule saying that you are not allowed to enter a trade right after you are stopped out. This is to avoid trading on emotions. You might even add to position size in order to make back the loss faster but this is again against the trading plan and a clear sign of lack of discipline.
In the trading plan you might also have a rule saying that if you have made money on your first trade of the day you will sign off and enjoy the rest of the day. Alternatively you might switch to simulator in order to keep you on top of the game. If you lack discipline and get greedy you will likely keep trading and if the next trade is a loss you might put on another trade to make back the profit and so on. This can then lead to overtrading and eventually leads to losses. Every time you find yourself overtrading you have got to ask yourself are there really that many high odds setups?
A Typical Scenario for a Trader Without Discipline:
You enter your trade based on a spontaneous decision that is not part of your trading plan, and the trade starts off in your favour with a small gain but suddenly drops beneath the entry price. Because you did not make the decision for entry within the parameters of the trading plan you have no exit strategy…..
You’re now in a position where you’re losing money and the only thing you have is your emotions to make your decisions……
Your mind will be telling you don’t take the loss, it will bounce, and even if I get out at entry I will be happy (the hope phase!) but then it drops further! You’re now in a position where you have to take the loss as it is either going to get you margin called or you simply cannot take the emotional and financial pain …..
This is a cycle we have to go through to understand and learn how to be a trader but is the hardest financial lesson you will ever learn. It is how you deal and cope with this that makes you a great trader! Discipline is ultimately a very important factor that needs to be conquered in order to survive trading the markets.