We’ve all been there – that sinking feeling in your gut, pained screams emanating from your mouth and that look of horror in your eyes as you can’t believe that your lack of trading discipline has cost you money yet again.
You swear to yourself that you will work on your trading discipline so that you’ll never feel that awful feeling again. Trading out of control is not just dangerous for your trading account, but it also takes a mental and physical toll on a trader.
Like every trader, I too have had my fair share of moments where I’m trading “on tilt,” angrily placing trades that violate my trading rules in an effort to make back the money I’ve already lost.
After deliberately working on my trading discipline, however, I can now happily say that while my trading discipline is not perfect, it has greatly improved to the point where my undisciplined trades are few and far between. Here are the 7 steps I took to improve my trading discipline that will work for you too:
1. Create A Consecutive Losers Rule
Like many traders, I noticed in my own trading that I became less disciplined after a string of losing trades. So, I created a very simple rule to reduce the likelihood of this happening: after a string of 3 consecutive losing trades, I calmly get up from my desk and take a walk. It doesn’t have to be a long walk, but I find that getting up from my seat and physically moving away from my trading workstation has the effect of calming my nerves and allows me to see the market from a fresh perspective when I return. Keep a note on your computer or at your desk to remind you of this rule, as you’ll often forget it or ignore it in the heat of the trading day.
2. Never Trade Hungry Or Sleepy
Trading discipline has a biological component as well. When your energy levels are low as a result of fatigue or hunger, you’re more likely to lose focus on your trading rules and make impulsive trades. In order to prevent fatigue, I make sure to get adequate sleep each night and will have some caffeine if I feel my energy levels dipping for a quick boost. In terms of hunger, it’s not always feasible to be able to walk away from my desk while trading to grab a meal, so I keep a variety of healthy snacks on hand to tide me over. I’ve seen many traders do damage to their accounts after staying out late the night before or skipping breakfast – avoid their mistakes!
3. Have Your Trading Rules Always Visible
While many traders go through the work to create a written set of trading rules to guide their trading and to enforce discipline, most of them skip the important step of keeping a physical copy of their trading rules on hand to guide their trading decisions. It’s necessary not only to create a list of trading rules to follow, but also to keep that list visible during trading to remind yourself of your trading rules. If your trading rules aren’t readily available, I can guarantee that you’ll forget or ignore them when you need them most. I keep a small post-it note that details my trading rules on one of my trading monitors to serve as a constant reminder to stay disciplined.
4. Limit Distractions
One of the most common mistakes I see beginning traders make is not focusing on the markets during the trading day. Instead of watching every tick of the market in hopes of gaining useful information for future trades, developing traders will often be browsing Facebook or watching Youtube videos. Being a disciplined trader in the face of market volatility can be tremendously difficult as it requires self-control and focus. If you’re splitting your attention between trading and other distractions, you’ll be much more likely to violate your trading rules and lurch into mindless trades. During trading hours, make an effort to cut out outside distractions and watch your trading discipline improve. I promise you that the Internet will still be there when the trading day is over!
5. Keep A Trading Journal
While keeping a trading journal is excellent advice for all traders, it’s especially useful for traders attempting to increase their trading discipline. A trading journal allows you to write down and analyze your trades, actions, and thoughts throughout the trading day. When I was having problems with my trading discipline, I used my trading journal to analyze those times when I was trading out of control to look for commonalities.
Surprisingly, my trading journal helped me realize that nearly all my trading discipline issues were a result of one of the trading strategies I was using. The strategy involved taking counter-trend positions in volatile stocks, and I would often get stubborn and increase my position as it went against me instead of getting out. Once I figured this out, I simply stopped trading that particular strategy and my trading discipline problems vanished! If I didn’t make extensive use of my trading journal, I wouldn’t have figured this pattern out and I’d still be trading that same strategy. Use your trading journal to analyze the factors and triggers that cause you to lose your trading discipline.
6. Have A Stress Release Process
No matter how talented of a trader you are, there will be times when nothing is going right and you just feel like screaming at the top of your lungs. You may even resort to slamming your keyboard or punching your monitor in frustration. While I wish I could say I’ve never cursed as the result of a bad trade, let’s just say that the trading floor would not be a suitable place for a preschool field trip! In order to calm yourself down and maintain your sanity, however, it’s important to have a defined stress release process that you use every time you get upset.
To illustrate the benefits of having a stress release process, let me tell you a true story that happened at my trading firm. The firm was having a bit of an issue with traders breaking their equipment in frustration after losing trades (a problem not too uncommon for professional trading firms) until they came up with the brilliant idea of giving each trader on the floor a stress ball to squeeze to release stress in a less destructive fashion. The plan worked as traders used the stress balls to relieve stress instead of taking out their frustrations on their keyboards.
To use this step in your own trading, think of non-destructive ways to calm yourself down while trading. I personally have found deep breathing exercises to be really helpful, while other traders I know use stress balls, exercise, or progressive muscle relaxation techniques. Experiment with these ideas or come up with your own so you can retain your trading discipline even in the face of adversity.
7. Have A Plan For Every Trade
Trading discipline is not just a mental skill that exists in isolation from the rest of your trading; rather, it’s a skill that flows naturally from a sound trading plan. Traders tend to lose discipline in the heat of the moment when a stock moves unexpectedly. To counter this tendency, it’s important to plan out every trade you make before making it, so you can be prepared no matter how the stock behaves. This includes setting a stop-loss and profit targets on every trade as well as identifying what scenarios would cause you to add to your position or reduce your position. The disciplined trader is invariably the prepared trader, so be sure to have a plan for every trade and you’ll never be caught off guard again.
Like all trading skills, trading discipline can be improved with deliberate practice. Trading discipline allows a trader to calmly execute his trading plan while avoiding the dangers of “revenge trading.” With trading discipline, you’ll no longer feel the frustration of realizing you’ve damaged your trading account by breaking your trading rules. If you follow the 7 steps outlined above to improve your self-control, you’ll be well on your way to becoming a disciplined trader.
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