The success that a trader achieves in the markets is directly correlated to one’s trading discipline or lack thereof. Trading discipline is 90 percent of the game. The formula is very simple:Trade with discipline and you will succeed; trade without discipline and youwill fail.
Review the following 12 Rules of Trading Discipline. You must condition yourself to behave with discipline over and over again.
1. THE MARKET PAYS YOU TO BE DISCIPLINED.
Trading with discipline will put more money in your pocket and take less money out. The one constant truth concerning the markets is that discipline = increased profits.
2. BE DISCIPLINED EVERY DAY, IN EVERY TRADE, AND THE MARKET WILL REWARD YOU. BUT DON’T CLAIM TO BE DISCIPLINED IF YOU ARE NOT 100 PERCENT OF THE TIME.
Being disciplined is of the utmost importance, but its not a sometimes thing, like claiming you quit a bad habit, such as smoking. If you claim to quit smoking but you sneak a cigarette every once in a while, then you clearly have not quit smoking. If you trade with discipline nine out of ten trades, then you cant claim to be a disciplined trader. It is the one undisciplined trade that will really hurt your overall performance for the day. Discipline must be practiced on every trade. When I state that the market will reward you, typically it is in recognizing less of a loss on a losing trade than if you were stubborn and held on too long to a bad trade. Thus, if I lose $200 on a trade, but I would have lost $1,000 if I had remained in that losing trade, I can claim that I saved myself $800 in additional losses by exiting the bad trade with haste.
3. ALWAYS LOWER YOUR TRADE SIZE WHEN YOU’RE TRADING POORLY.
All good traders follow this rule. Why continue to lose on five lots (contracts) per trade when you could save yourself a lot of money by lowering your trade size down to a one lot on your next trade? If I have two losing trades in a row, I always lower my trade size down to a one lot. If my next two trades are profitable, then I move my trade size back up to my original lot size. Its like a batter in baseball who has struck out his last two times at bat. The next time up he will choke up on the bat, shorten his swing and try to make contact. Trading is the same: lower your trade size, try to make a tick or two or even scratch the trade and then raise your trade size after two consecutive winning trades.
4. NEVER TURN A WINNER INTO A LOSER.
We have all violated this rule. However, it should be our goal to try harder not to violate it in the future. What we are really talking about here is the greed factor. The market has rewarded you by moving in the direction of your position, however, you are not satisfied with a small winner. Thus you hold onto the trade in the hopes of a larger gain, only to watch the market turn and move against you. Of course, inevitably you now hesitate and the trade further deteriorates into a substantial loss. Theres no need to be greedy. Its only one trade. Youll make many more trades throughout the session and many more throughout the next trading sessions. Opportunity exists in the marketplace all of the time. Remember: No one trade should make or break your performance for the day. Dont be greedy
5. YOUR BIGGEST LOSER CAN’T EXCEED YOUR BIGGEST WINNER.
Keep a trade log of all your trades throughout the session. If, for example, you know that, so far, your biggest winner on the day is five e-Mini S&P points, then do not allow a losing trade to exceed those five points. If you do allow a loss to exceed your biggest gain then, effectively, what you have when you net out the biggest winner and biggest loss is a net loss on the two trades. Not good.
6. DEVELOP A METHODOLOGY AND STICK WITH IT. DON’T CHANGE METHODOLOGIES FROM DAY TO DAY.
You must have a game plan. If you have a proven methodology but it doesnt seem to be working in a given trading session, dont go home that night and try to devise another one. If your methodology works more than one-half of the trading sessions, then stick with it.
7. BE YOURSELF. DON’T TRY TO BE SOMEONE ELSE.
In all of my years as a trader I never traded more than a 50 lot on any individual trade. Sure, I would have liked to be able to trade like colleagues in the pit who were regularly trading 100 or 200 lots per trade. However, I didnt possess the emotional or psychological skill set necessary to trade such big size. Thats OK. I knew that my comfort zone was somewhere between 10 and 20 lots per trade. Typically, if I traded more than 20 lots, I would butcher the trade. Emotionally I could not handle that size. The trade would inevitably turn into a loser because I could not trade with the same talent level that I possessed with a 10 lot. Learn to accept your comfort zone as it relates to trade size. You are who you are.
8. YOU ALWAYS WANT TO BE ABLE TO COME BACK AND PLAY THE NEXT DAY.
Never put yourself in the precarious position of losing more money than you can afford. The worst feeling in the world is wanting to trade and not being able to do so because the equity in your account is too low and your brokerage firm will not allow you to continue unless you submit more funds. I require my students to place daily downside limits on their performance. For example, your daily loss limit can never exceed $500. Once you reach the $500 loss limit, you must turn your PC off and call it a day. You can always come back tomorrow.
9. EARN THE RIGHT TO TRADE BIGGER.
Too many new traders think that because they have $25,000 equity in their trading account that they somehow have the right to trade five or ten e-Mini S&P contracts. This cannot be further from the truth. If you can.t trade a one lot successfully, what makes you think that you have the right to trade a 10 lot?
10. GET OUT OF YOUR LOSERS.
You are not a loser because you have a losing trade on. You are, however, a loser if you do not get out of the losing trade once you recognize that the trade is no good. Its amazing to me how accurate your gut is as a market indicator. If, in your gut, you have the idea that the trade is no good then its probably no good. Time to exit. Every trader has losing trades throughout the session. A typical trade day for me consists of 33 percent losing trades, 33 percent scratches and 33 percent winners. I exit my losers very quickly. They dont cost me much. So, although I have either lost or scratched over two-thirds of my trades for the day, I still go home a winner.
11. THE FIRST LOSS IS THE BEST LOSS.
Once you come to the realization that your trade is no good its best to exit immediately. Its never a loser until you get out and Not to worry, itll come back are often said tongue in cheek, by traders in the pit. Once the phrase is stated, it is an affirmation that the trader realizes that the trade is no good, it is not coming back and it is time to exit.
12. DON’T OVER-ANALYZE. DON’T PROCRASTINATE. DON’T HESITATE. IF YOU DO,YOU WILL LOSE.
The net result of all this procrastination and hesitation is the trader was correct in deducing market direction but his profit on the trade was zero. We dont get paid in this business unless we put the trade on. Dont overanalyze the trade. Place the trade and then manage it. If youre wrong, get out. But youll never be right unless you actually make the trade.