October 27, 2020

How Trading Discipline Leads to Better Trades

How Trading Discipline Leads to Better Trades

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“Discipline is the practice of making people obey rules or standards of behaviour, and punishing them when they do not. Discipline is the quality of being able to behave and work in a controlled way which involves obeying particular rules or standards.” – collinsdictionary.com

Trading discipline involves making yourself follow your own trading rules. Self discipline enables a trader to trade a system consistently over time like they planned to with the right position sizing, stop losses, and trailing stops.

Many times a trader can feel like they are two different people. They can feel calm and rational when the market is closed and they are researching trading, developing a system, and planning on the strategy they will use to enter and exit trades and how big their position sizing will be. Then when the market is open, prices are moving, and they are making or losing money then emotions and ego can rise up and make it more difficult to think clearly and follow their predetermined plan. Being a professional trader is the ability to do the right thing regardless of how you feel.

Here are five times a trader will be tempted to lose their discipline and follow their emotions, desires, or ego over their trading plan and what to do about it.

The lack of discipline to take a trade when you have a signal can be devastating as you miss the good trades. Fear can be holding you back from taking your entries. The causes can be that you don’t have faith in your signals because you have not backtested them enough, don’t understand the edge, or you are simply trading too big. In trading you will have losses and you have to accept it if you want to trade. If you felt too much stress when taking a trade decrease your position size until you are comfortable enough to enter.

“I take the point of view that missing an important trade is a much more serious error than making a bad trade.” – William Eckhardt

Fear of missing out can cause a trader to lose discipline and enter a trade too late leaving them with a bad risk/reward ratio. Knowing that no one trade will matter much in your next 100 trades will help lower the desire to chase. There will be other trades, wait for them.

Entering too early into a trade can be a loss of the discipline of patience. Front running a signal to try to get a better price is dangerous because you are buying randomly and with no edge. A signal is a safety filter to ensure you have a better chance of making money on a trade. If you don’t have the discipline to wait for your signal then you have no edge over other traders. 

“As a result of having no system and no rules, they have no way of effectively managing their trading. How well do you think a company would operate with no plans, no business systems, and no rules? Because they have no rules to follow, everything no-rules discretionary traders do is a mistake.” – Van Tharp

Letting your own beliefs about what the market should be doing or your bias about what the market will do in the future can interfere with your discipline to follow your own trading system. A trader has to have the mental flexibility to understand anything can happen and also the discipline to follow their trading system so they will be able to capture the moves when they happen. 

The discipline to follow your trading system is an edge. If your trading system has a quantified profit factor over a series of trades or you are a discretionary trader with rules that create good risk/reward ratios then your job is to simply be a disciplined trader and let your edge play out over time. You are your edge. 

In trading, discipline is an edge. Having the ability to implement your trading plan in real time consistently will make you a better trader and create better trades. No trading system will be profitable no matter how good it is if it can’t be implemented with discipline over the long term.

Discipline is the art of execution. Discipline can emerge from having faith in yourself and your trading system so your trading plan can be used as a compass not a suggestion.

How Trading Discipline Leads to Better Trades

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