Discipline: An essential attribute of a good day trader

Discipline: “Habit of Obedience”

This is the part of the definition of discipline of most relevance to day traders, the key word being “habit”. At its simplest, in the context of day trading, discipline is the practice of making what you do a habit. As a day trader is often faced with making certain decisions, discipline implies the need to act consistently, in a reliable manner, and in accordance with the pre-determined trading strategy or system set forth in your trading plan.

Have a trading plan or system is essential to the exercise of good discipline, as it normally imposes certain parameters and sets out certain criteria which dictate how trading decisions should me made and what needs to be done in certain situations.

Habitually following your plan is what is meant by the exercise of good trading discipline, which, in turn, will help you realize the best expected results possible from your plan. If you find that your trading plan or system is not meeting your expectations, despite habitually following it for a reasonable period of time, good discipline requires that you be prepared to review it and make any adjustments or fine tuning necessary for future use.

Lack of Discipline

Day traders who suffer from lack of discipline often allow their emotions to rule their trading decisions, which often leads to bad decisions and unacceptable trading losses. Never allow your emotions to rule your trading. In order to day trade successfully, you must develop a trading plan (subject to any changes to it that you feel may be necessary from time to time) and consistently stick to such plan. You must avoid a “shooting from the hip” or a “seat of the pants approach” to day trading. Get out of the market when you have reached your initial objective and do not let emotions like fear and greed influence your trading decisions.

Many inexperienced traders demonstrate lack of discipline by being afraid or reluctant to take losses and to get out of a instrument when it goes down, in the often vain hope that the instrument price will rise again. Often, however, the instrument price tumbles even lower, and the trader’s initial small loss in the trade becomes a large one. Likewise, some day traders often get greedy if the instrument price rises and are reluctant to take profits off the table when their trading plan or system suggests they should. They think the instrument price will rise even more, and they can make even more profits. However, the instrument price may subsequently drop, causing their gains to dwindle or become losses. Fear or greed are two emotions that should play no role in the life of a disciplined day trader.

What It All Means

In short, discipline requires that you:

  • Trade on the basis of trading plan and not on the basis of your hunches or emotions
  • Take a profit when you’re supposed to in accordance with your pre-determined plan
  • Take a loss when you’re supposed to in accordance with your pre-determined plan
  • Don’t trade when there’s no need to (over trading; trading for the sake of making a trade)

A disciplined trader ordinarily does all of the following:

– develops a unique trading plan or system based on his or her own personal techniques;
– constantly grades his or her own adherence to a chosen trading plan;
– keeps accurate records of all trades entered into;
– attempts to achieve, with only minor losses on a limited number of transactions, a positive overall performance return of at least 20% return per annum;
– is self-reliant and rarely instruments information or listens to advice from others;
– finds the time to learn as much as possible about his or her chosen market;
– monitors the chosen markets every day even if he or she is not actively trading; and
– learns new ideas to improve trading methods, but does not use them before testing them

If you exercise the qualities of discipline outlined above, the likelihood of you achieving day trading success will be greatly enhanced.