|
|
Business & Finance
>>
Investment
>>
Market Theory
>>
|
Importance of Discipline in Trading Markets
Self-control 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.
One definition of discipline is, “controlled behavior resulting from disciplinary
training; self-control”(answers.com).
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.
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:
- 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
- Stick to decisions. Good traders work in isolation and make commitments, not letting other
people (e.g. brokers, other traders) influence their decisions
- Learn from losses. Losses are expensive tuition to avoid repeating the same errors
- 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.
- 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.
- 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:
- “On Discipline”, Jake Bernstein, in High Performance Futures Trading, Joel
Robbins Ed., Probos Publishing Co. Chicago, 1990.
- “Trading Rules – Strategies for
success”, William F. Eng, Wrightbooks, Australia, 2000
|
|
Custom Search
|
