Build Your Discipline -- and Your Bottom Line
By Alan Farley
12/17/2002 12:10
Trading is a lot harder than it looks. You can read all the books, follow all the gurus, and still fail miserably when it comes time to risk your own capital.
As it turns out, learning advanced trading techniques is the easiest part of the job. Applying them is far more difficult. Most traders fail because of a lack of discipline rather than a lack of knowledge.
I've taught hundreds of students over the years, and understanding this little piece of wisdom turns out to be their greatest challenge. The problem is that new traders think there's a holy grail that, once found, will unlock all of the market's mysteries. But nothing could be further from the truth. To twist Thomas Edison's famous observation, successful trading is 1% inspiration and 99% perspiration.
Most of us lack trading discipline and don't even think about it. But serious traders will force themselves to look in the mirror and take control of their positions and pocketbooks. To get you started, here are 10 ways to improve your market discipline.
1. Honor your stops. Traders aren't investors, and they shouldn't act like them. You buy or sell stocks because you think you know where they're headed. When they go the opposite way, you're wrong, and you need to get out of the market as soon as possible. Stops force you to think about the price where you screwed up.
2. Have a trading plan and learn to follow it. What exactly are you trying to do with the position you took this morning? Determine your holding period in advance, and stick with it. Then wait for the weekend to make adjustments to your trading plan, when you're away from the heat of battle.
3. Reduce your position size. Big risk blinds traders to the big picture, because it becomes an all-or-nothing exercise. Small positions can be managed objectively and by the numbers. Keep in mind it's the numbers that will save your hide in the long run, not the big play.
4. Match your trading to your lifestyle. Do you bite off more than you can chew? Do you have a full-time job but try to play the markets like a daytrader? Or do you look at 50 stocks each night when you only have time for 10? It's better to know a few plays well than a big list you don't have time to follow every day.
5. Take a giant step back from the trading screen. The price wiggle will freeze your brain and make you forget why you're there. Get rid of the Level II screen and half the intraday charts you look at each day. Then focus on the longer-term swings and avoid the market noise.
6. Hit singles before swinging for the fences. Forget the big play and try to take a few dollars out of the market each day. This builds discipline faster than betting the farm on a single stock.
7. Practice your fire drill. All traders face the threat of big losses from time to time. These unfortunate events may give you only minutes to act before they steal a fortune from your trading account. Prepare mentally by visualizing an emergency exit for each new trade you take. Then head for it at the first sign of trouble.
8. Turn off the tube and get away from the stock boards. Your opinion is the only one that counts when you put your capital at risk. The talking heads will make you question your strategy and your discipline. Other shareholders or short-sellers can't tell you when something has gone terribly wrong with your position.
9. Read a good book. For example, pick up The Disciplined Trader by Mark Douglas, and study it in detail. You'll discover all the reasons you never wanted to make money from trading in the first place. Then you can finally do something about it.
10. Fix the rest of your life first. We smoke, drink and eat too much, but we want to trade like Gandhi when we take a position. If you have no discipline in the rest of your life, you won't find it in trading. Do all things in moderation and get a good night's sleep. You'll be amazed what it does for your bottom line. |
