“I have two basic rules about winning in trading as well as in life: 1. If you don’t bet, you can’t win. 2. If you lose all your chips, you can’t bet.” – Larry Hite
Traders enjoy a crucial advantage over investors — the ability to make money whether the market is moving up or down. This fact should not, however, lead you to believe that trading is easy; it requires both a skill-set and rigorous discipline.
Why do 90% of traders lose money in all market conditions? And despite the fact that sooner or later most of their views come true – the bulls get their highs and the bears get their lows – but often when they are no longer in the game!
The missing link – Discipline!
No trader can be successful unless he or she has developed trading discipline and learned to avoid the most common trading mistakes such as breaking trading rules and executing trades prematurely, making impulsive trading decisions, violating risk management rules, revenge-trading and over-trading, and most importantly, not following Stop Losses on trades. And, all of these things inevitably result in losing much more money than what a trader had originally anticipated and what would be necessary.
Everyone usually knows what the ‘right’ thing to do would be, but following through and actually doing it is much harder. But the following tips may help!
1) Develop a Trading Plan
In a trading plan, you plan your trades ahead of time. Before you start your trading session, you sit down and analyze your instruments and create specific trade scenarios and map out potential trade ideas. You also write down things that need to happen in order for you to take a trade. Then, when the markets open, you simply wait for these things to happen before you execute your trade.
Every time you are about to enter a trade, you revisit your checklist and check off the things you can see on your charts.
With a checklist, it becomes obvious right away if a trade really matches your criteria or not.
2) Review your trades
“We do not learn from experience …we learn from reflecting on experience.” – John Dewey
Most traders will never look at their trades again after they have closed it. They will just move on to the next trade, forget about what they did before and completely avoid learning effects.
If you know that you have to later enter your trade into your journal and write down that you made the same mistake AGAIN, you will think twice if it’s worth it.
Keep track of the following in the journal:
Risk
How was the stop loss defined? Why did it fail? What was the risk return ratio prior to trade and what eventually happened? Being certain about how much to risk on a single trade and not going beyond this threshold may limit losses and help him stay out of those trades where his undisciplined self wants to take over.
Specific rules about how to set a stop loss order and when to cut losers is also possible for discretionary traders. Not letting losses get out of hand and having a fixed plan about how to execute your stop loss orders is a must for every trader.
Profit taking
When it comes to profit taking, there are two common problems. First, traders are too fearful and close trades too early and miss out on potential profits. And second, traders become too greedy and want to generate more profits by not closing winning trades and eventually giving back their profits. If you find yourself among these groups, creating rules about profit taking can help you build a more disciplined approach and avoid the common mistakes.
Learn about how to trail profit booking orders or using broker platforms to do what is called a Bracket Order or a Cover Order facility so the emotion goes out and the plan kicks into action!
3) Recognise Your Trading Style and Adapt
Whereas swing-trading requires more patience before and during trades, a day-trader has to deal with emotions very effectively and move on to the next trade fast, even after realizing losses. A naturally more impatient and emotional unstable person may have difficulties following a discretionary trading approach and would probably do better by having a set of fixed rules or creating an automated trading strategy.
The point is, no matter how many tips you follow and tools you use for your trading, by building a trading strategy and style around your strengths and weaknesses, you could potentially remove some of the negative impacts that undisciplined trading has.
4) Never blame the market for your reverses
Disciplined traders do not blame the market, the government, the companies or anyone else, conveniently excluding themselves, for their losses. The market gives ample opportunities to traders to make money. It is only the trader’s fault if he fails to recognise them.
5) Learn When to enter
The best time to enter for intraday trade is after 30 minutes when the market opens. Some people will jump in the market at the opening bell itself which is a very high risk and random strategy. First enter in some small quantity, say 25% of the quantity one is intended to buy. Learn to wait some time and watch the trends and enter accordingly.
5) Never, under any circumstance add to a losing position! Wait till the right opportunity springs up!
Remember – Discipline will keep you in the game, keep your losing trades within reason (assuming you aren’t trading penny stocks, in which a stop loss order won’t do anything for you), eventually help you consistently profit at a high rate.
And the main thing in trading discipline – stop loss orders , the most important trading aspect of making sure you do not blow out your account.
Focus: The Things to Remember for Stop Losses
• Use hard stop loss orders: The first step to trading is recognizing that you are not in control. That the market does what it wants to do and that you do not have an opinion in the matter.
• Remember, the profits are in the risk-reward. If you aren’t profiting enough to cover the risk, then you simply are not profiting in your trading strategy. Keep risk tight and it makes profiting so much easier. But if you keep the risk large and the stop loss orders wide, then you will find profiting in the stock market a difficult proposition.
• Use stop loss orders to trail profitable trades and ensure you keep the majority of your profits
• Use stop loss orders to protect you from yourself! If you don’t take managing risk more serious than profiting in the stock market, you are setting yourself for failure.
Try to harness the power of making good habits and overcome discomfort, gut feeling, and insecurity, at the same time respecting the iron hand of discipline, there will be no limit to how much you can succeed and develop as a trader.