How to Develop Trading Discipline

Updated: Jan 10

How to develop the mindset of a Professional Trader/Investor

How to develop trading discipline


Trading is one of the most challenging professions, which is why the number of successful traders in the world is limited. However, unlike the popular belief, it’s not the IQ that makes the difference. If you zero in on the single most important factor that separates the successful traders from not-so-successful ones, it will be hands down the “discipline”.



As the popular trader and index developer, Victor Sperandeo puts it, “The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading."


Why most traders overlook discipline


Most traders get in the market when it’s easier to make money and they need not adhere to any discipline. Traders adopt inappropriate ways of trading when the going is good and continue to follow the flawed methods when tides turn.


The human mind is hardwired to think linearly, but the markets are anything but linear. In fact the markets are quick to take back what they delivered in good times.


While you can definitely profit occasionally abandoning trading discipline, those profits aren’t forever. In fact, such occasional profits lead to bad habits that prove to be costly in the long-run.

The volatile nature of markets brings out the worst in traders, who not only lose their profits but also their capital.


What disciplined traders do differently


Disciplined traders weigh each trading action or inaction for how it fits in the overall scheme of trading discipline.


They have set rules and a robust trading plan to deal with every eventuality, that takes emotion out of the decision making.


All the trading decisions including entries, exits, position sizing and leverage are pre-defined with little subjectivity. It’s a trading guide, that’s sacrosanct to their trading. The idea is to never deviate and keep referring back to the guide when in doubt.


Successful traders also have their share of struggles with discipline, but they keep on it, improving bit by bit, and building a sound foundation.



How can you develop a trading discipline?


The process of developing trading discipline begins with self-realization that the market doesn’t owe you anything. It can give and take back money in quick succession.


It’s like sailing a large ship in the ocean and you, as a captain, must know when to speed up, when to slow down, when to dock and how to dodge the dangerous areas to keep the ship in good shape.



While trading, your capital is your ship and you must prepare yourself to navigate the choppy market waters.


Here are a few factors you must work on to get your trading discipline in order



Know Yourself


You first need to know yourself emotionally and choose your trading strategy accordingly. There are different kinds of traders and all of them have different mental setups.


For example, a swing or positional trader will be more patient, would take fewer trades and gun for big moves, but a day trader would be more active, capture smaller moves and take many more trades. Both these kinds of trading require different mental setups and different temperaments.



When you begin trading, ask yourself which style is more suited to your personality. If you don’t know it yet, try different trading styles with small capital and see which is more suited to you. You will reach the conclusion sooner if you keep documenting your experience as you go.


Plan Well


Irrespective of the trading style you choose, you will need to have a robust plan from the start. A plan lists out everything from screening to drawdowns, in order to react quickly to ever-changing market conditions. A plan is helpful because you don’t have to take random, unplanned decisions when presented with a situation.


For example, a good trading plan lists how you would act when your trade is in profit. Your plan can be to take part profits and ride the balance of the move until the technical strength is intact, or it could be to sell the entire position as soon as the profit target is met.


A good plan takes into account the market conditions and states how would you behave when the markets are trending vs when they are choppy.



It’s advisable to write down the plan as you begin because you would need to refer to the plan again and again as you are confronted with different situations. Without a written plan, your trading will have significant randomness, which isn’t good.



Rule Checklist


Prepare a checklist that must be followed before acting on trades. You don’t need to have too many checks, but the key ones for all your trading actions.



For example, an entry checklist would need a good technical setup, right entry price, not chasing the price too much and a good fundamental story if you also use qualitative parameters. To further strengthen risk management, you can determine the position size based on how the general market is behaving.



You would need checklists for all such decisions. The more you would practice, the more intuitive and easier it will get.


Journal


You must journal each of your trades, documenting your thought process when you took the trade. You must also document what you plan to do as the trade progresses. If you deviate from your original intention and make an unplanned move, that also must be documented.


Journaling is essential in highlighting and correcting mistakes. If you don’t learn from your mistakes, you will keep on making them, forming bad habits, and practicing imperfectly.



Stop looking at the money

An essential element of trading discipline is to stop looking at the money and just follow your rules diligently. The more you will look at your fluctuating account value, the more mistakes you will make.


It’s rather advisable to screw the money and focus on being the best trader you can be. Stick to the rules, follow the process, and money will follow.


The Final Word


Discipline in trading or any other area is hard to build and harder to stick to. However, the greatest achievers in any field are the ones who are the most disciplined.


The bright end of working on discipline is the immense success that will accrue to you sometime down the line.


It’s easier when you just embrace the process, perfect it and adhere to it at all times, decoupling all your emotions from trading. Try to be the best at trading and money will eventually follow sooner than you think.



See our Youtube channel here to help you on your journey, or even join our Group/Forum - Group





Good luck!