Get Rid of Your TradingDiscipline Problems Once and for All
Have you fell victim to this? You record a string of good trades (all profits) only to throw it all away on a whim. If you’ve never been that unfortunate then you are lucky; but about 80% of traders are not so lucky.
This doesn’t mean that the other 20% of traders will always have lucky days. Some trades just go bad, no matter what you do. The trick is to plan for those bad trades and execute a trade plan based on sound risk management parameters.
Easier said than done, right?
The reason getting it right seems so elusive to most traders is discipline; or rather a lack thereof. You see, discipline is the thing that allows you to have predictable trading scenarios.
Let’s look at an example. You’ve created a rigid process for picking and managing your trades. You never execute unless a predetermined set of variables have been identified – you’ve setup what many skilled traders call, a “mean reversion strategy.” This strategy harmonizes with your risk management strategy. But imagine that you enter a trade based on an event; something that falls beyond your mean reversion parameters. What happens? Trade goes south and you lose money because you’ve moved away from your core execution strategy. In other words, you suffer a lapse in discipline.
This sort of lapse in discipline affects a great majority of traders. They lack a clear understanding of their own trading style; they almost always don’t have any perspective on which trades they should focus for maximum gains, and they almost certainly can’t articulate clearly what strengths and weaknesses they may have.
To avoid falling into that boat you can do very simple things like analyzing each trade and build up a composite picture of what goes inside your trading account.
Here are some useful questions to ask (and answer):
What influenced my entering this trade?
Did I have an edge in this trade?
Did I enter this trade with a clear strategy?
Did I have a plan, and did I stick to it?
Did I take account of volatility in sizing my trade?
Was I aggressive enough?
What was the key lesson, if any from this trade?
Scrutinizing and asking these questions is the path to success. It’s the same approach Warren Buffet takes in establishing his “circle of competence.” Everything that has ever served him well gets dumped inside that circle. Anything that didn’t gets banished to Siberia. Above all, by sticking within his circle of competence, Buffet builds discipline of execution. And so can you.
Discipline goes beyond just building up your competence, however. You need a robust risk management plan and strategy in order to stay afloat. One of the better ways to develop such a plan and strategy is to painstakingly analyze your trades – every last one of them. A simple example can show the benefit of this. Let’s imagine that you establish a win/loss ratio of 50% and that each winning trade on average yields $200. By analyzing and establishing these numbers, you can work safely within draw down limits; i.e., make more money than you lose. This sort of discipline is what gives you an edge in trading; it’s also the sort of discipline that allows you to keep your trading account active.
Good trading discipline ultimately increases your chances of long-term success. And the key to developing this discipline is to know intimately, the inner workings of your trading operation.