Importance of Discipline in Trading Markets

Self-control is Key to Running a Stock Trading System Successfully

Feb 8, 2009 Harry P. Schlanger

The type of discipline required to trade profitably in stock markets is the same as that required to lose weight, stop smoking, or run a successful business.

Anyone wishing to be successful in trading any financial markets, such as the stock market, futures markets, commodity markets, currency trading, etc., needs plenty of that complex, elusive, evasive, and often camouflaged human quality -- discipline.

One definition (answers.com) of discipline is, “controlled behavior resulting from disciplinary training; self-control” .

The roots and basics of all discipline are the same but according to Jake Bernstein, noted futures trader and author, discipline in trading financial markets is virtually impossible to teach and learn from anyone else. However, there are guidelines one can follow.

The Nature of Trading Systems

Trading systems and methods are normally tested by computer in order to generate hypothetical or ideal results. They are tested with perfect adherence to trading rules that have been programmed in the computer's software. Whatever the winner success rate of the trading system, 60 or 80 or 90 per cent, there are no errors to the routine of trading.

In real time, therefore, the trader must duplicate the same ideal conditions if the same performance is to be replicated. There is no room for lack of discipline, since errors can interfere significantly with profits that are obtained on average.

Traders do understand that discipline means the ability to follow their trading system and approach. It is interesting that some traders have virtually no objective trading system, but through dedication and development of discipline, they have achieved success. On the other hand, there are traders with excellent trading systems, statistically capable of massive profits, but those traders have remained unsuccessful because of their lack of discipline to the application of the trading rules.

Lack of Trading Discipline is Contagious

As in interpersonal relationships, in a relationship with the marketplace, a trader's lack of discipline can cause negative interaction that may result in further tests of discipline and self-control. The frustrated trader is then likely to create more and more errors, compounding into serious losses and spinning out of control.

Suggestions for Improving Trading Discipline

The following are guidelines that can be used for improving discipline. They will require action and thorough implementation:

1. Make a schedule. Keep trading signals up to date, be prepared for when the big move comes and don’t try to trade too many markets
2. Stick to decisions. Good traders work in isolation and make commitments, not letting other people (e.g. brokers, other traders) influence their decisions
3. Learn from losses. Losses are expensive tuition to avoid repeating the same errors
4. Stick with the Trading System. Some traders quickly switch from one trading system to another. This is one of the worst forms of discipline. Traders should stick to their trading system to give it sufficient time to perform.
5. Know when to exit. It is important to have an objective measure of when to terminate a given trade, whether the trade is profitable or not.
6. Take a break when needed. Traders need to be self-aware and when mistakes are made as judged by a string of losses, to take a break, recoup energies and remake commitments.

Trading Discipline - Emotional Development

Successful traders do not let their emotions, their temper, or frustrations get in the way of their trading. Novice traders often talk of the mythical beast – the market, and then proceed with revenge trading. For example, in the statement, “I was so annoyed that I bought more as they fell,” the trader aims to get even with the market. Experience is the greatest teacher, with emotional discipline a result of the journey from novice to craftsman.

References:

1. “On Discipline”, Jake Bernstein, in High Performance Futures Trading, Joel Robbins Ed., Probos Publishing Co. Chicago, 1990.
2. “Trading Rules – Strategies for success”, William F. Eng, Wrightbooks, Australia, 2000

The copyright of the article Importance of Discipline in Trading Markets in Investment is owned by Harry P. Schlanger. Permission to republish Importance of Discipline in Trading Markets in print or online must be granted by the author in writing.

Discipline in Stock Trading

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