Everyone says that psychology is the most important part of trading. So if trading is 80% psychology, what makes uppsychology? I believe psychology can be broken down into two parts: patience and discipline. This article focuses on discipline, and why it is so essential to your trading success.
A disciplined trader gets consistent results
One of my mentors once told my ‘If you can’t follow a set of rules, you’re going to find trading very difficult indeed.’ How right he was! Trading profitably requires following a set of rules. Rules that over a sample of trades gives you high probability entries into the markets, in order to make a profit. It does not guarantee that you will win every trade, rather over a sample of trades, have an edge in the market, and expect to generate profitable results.
The First Step
The first step is an obvious one but often overlooked which is to write down your precise trade plan. Only when you define your exact criteria for entries and exits, money management and trade management plan will you have any chance of even evaluating whether a system is profitable or not.
Most traders just assume they know their trade plan because they have read it in forum or been taught it via education companies but few still bother to define it correctly which leads to sloppy habits and inconsistent trading. You can define your trading plan within minutes and writer in a notebook. This simple step alone will differentiate you from most of the losing traders out there.
The Second step
You need of course to ensure that your system or strategy is profitable. The best ways to do this is to back test the system. Prove that it has worked in the past, then to forward test your system on a demo account or very small risk on a live account. Forward testing is absolutely essential for any system, as you can guarantee that when real emotions come into play, you need to know that you can execute your system.
Only fools don’t forward test, and only fools trade a system live straight away on their hard earned money without ever having simulated it for a couple of months. I know that the temptation to get into the market is strong, but is a lot easier to lose money in the markets than it is to make money. Therefore the discipline to apply your strategy on a demo account for a 2 month period is time well spent, and will arguably end up saving you money in the long run.
What is consistency?
You can learn to trade, but your edge needs to be applied correctly, consistently to get results. Consistency of results comes from consistency of your actions, and consistency of your actions comes from executing your strategy flawlessly, every time it sets up, on every market you trade.
In order to do this, you must have the discipline to take your trade setups when they occur, and manage your trades as per your rules. This way you are applying your edge in the markets, and only trading when you have your edge. Breaking your rules will typically lead to you to lose money. Of course any one trade can always be a winner or a loser, but over a sample of trades, breaking your rules makes using your system completely pointless.
Consistency only comes from the belief in your system. Once you have the belief in your system and understand what profits it is capable of generating, you will develop the discipline to trade it.
What is discipline?
As per Wikipedia ‘Discipline is the assertion of willpower over more base desires, and is usually understood to be synonymous with self-control. Self-discipline is to some extent a substitute for motivation, when one uses reason to determine the best course of action that opposes one’s desires.’
This means we have to use the more evolved parts of our brain to stay disciplined and follow our rules, as opposed to allowing our base desires to take control and wreak havoc.
So how do I improve my discipline?
Trading with your edge is essential to remain profitable, but it’s so easy to slip into bad habits and find an excuse to get into the market. Sloppy & inconsistent behavior will get sloppy & inconsistent results.
To help concrete your discipline the let me explain principals of Airline pilots as its the most disciplined professions in the world –
Pilots routinely use checklists which encompasses all factors of checking the plane as well as their psychological state, as a means to plan for the flight ahead and make good aeronautical decisions.
Traders should also incorporate your trading criteria as a series of checklists but also manage your psychology through reminders and/or trading affirmations. By filling in your checklist each time BEFORE you place your trade you are ensuring you are following your plan with discipline and consistency. After a series of 100 consistently executed trades you will learn the true profitibility of your trading system. Only then can you judge if your system is effective or not.