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Trading Discipline


Our goal as traders is to achieve consistent profitability. In order to be consistently profitable we need to be consistent in our trading method and behavior. A nice benefit of developing consistency is your confidence in yourself and your trading plan will become stronger over time.

Trading Discipline is the consistent application of a trading plan. We can have the world's best trading signals and trading plan, but if we do not have the discipline to adhere to and follow the the trading plan, then our trading results will suffer. So what causes us to divert from our trading plan ?

In order to be consistently profitable we need to develop behaviors that consistently produce the results we desire. In the heat of the moment our trading behavior arises primarily from the trading habits we have developed over time. It is our reactive (usually emotional) trading habits that typically subvert the good intentions of our carefully designed and well thought out trading plan. Thus, we need to identify our bad habits and replace them with good habits. We must bring our trading habits into harmony with our trading plan.

The most destructive trading habits, or "deadly sins of trading" are:

#1. Not using a protective stop loss order in every trade.
With the advent of automated trade management platforms, such as NinjaTrader, there really is no legitimate excuse for not placing a stop loss order for every trade entered. The stop loss order is there to protect your trading account from the real potential of a large loss resulting from the trade. When you enter a trade, you must always account for and protect your trading account from this possible outcome. The mantra is: "The first loss is always the best loss."

#2. Adding to a losing trade.
I call this bad habit the sure path to destruction. This deadly sin is a direct result of #1. If you took your initial protective stop loss in the first place, then you would not have a losing trade open to add to. The problem here is, in adding to a loss, you are fighting the market and assuming your right when the market is already signaling to you that your wrong. This habit arises from our need to be right and goes to the heart of our self-worth. If we take a loss, then we would be admitting we were wrong in the first place. By adding to the losing trade, we are attempting to negotiate a reasonable outcome from the market, but in cold reality we are telling the market we cannot admit we are wrong. The other problem with this habit is that it has no mathematical basis to support it, thus it is a purely emotional reactive behavior that must be overcome and eliminated from your trading.

#3. Over leverage.
Over leverage arises from impatience. This is the attempt to trade larger position sizes than the trading account can mathematically support. This also includes the trade size you should be trading relative to your actual trading experience. Some new traders move into too much size before their trading experience can sustain that position size. Over Leverage requires a higher win% than most traders can realistically achieve, especially so for new traders. The trader that over leverages his position sizing is attempting to make more money faster than can realistically be achieved. Leverage being a double edged sword, will in the end cause the exact opposite effect for the impatient trader, by draining the account balance twice as fast. A string of two or three big losses in an over leveraged account will spell a quick end to the trader's brief career. Add habits 1 + 2 + 3 together and you have the perfect formula for failure.

Profitable trading is the result of consistent application of a sound trading plan. Obviously I have only scratched the surface of this topic, there are many excellent books written on the subject. The starting place for deeper research is the book "Trading in the Zone" written by Mark Douglas. Also Brett Steenbarger has written several good books and has an in-depth web-site and blog he maintains. He has a number of good articles worth reading here Brett Steenbarger
Excellent post PT!
Hi PT. I know you have been helping out. Thanks.

Do put your trading first like VO have mentioned before this chat thing came about. Those NooBs wanting to enter this group can wait while your trades complete their execution.

BR,
LordAlfa