Trade with Discipline
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 you will fail.
Although my formal academic education consists of a bachelor’s degree in commerce from the University of Bombay (Now Mumbai), I never considered myself to be an extremely gifted student. I have no formal training in market technical analysis. I was unable to even set up a Fibonacci study or Moving Average study on a charting package, let alone know how to trade with such data. I have no formal training in market fundamental analysis.
How, then, have I been able to succeed, day after day? The answer is simple: I trade with discipline, and I respect the market. When I’m wrong I get out immediately, and when I’m right, I don’t get too greedy. I’m content with small winners and at the same time I’m accepting small losers.
Review the following Rules of Trading. You must condition yourself to behave with discipline over and over again. You may read through the following rules every day before the trading session begins. It doesn’t take more than three minutes to read through them. Think of the exercise as praying — reminding you how to conduct yourself throughout the trading session.
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 it’s 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 can’t 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 Rs. 200 on a trade, but I would have lost Rs. 1,000 if I had remained in that losing trade, I can claim that I “saved” myself Rs. 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 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.
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.
There’s no need to be greedy. It’s only one trade. You’ll make many more trades throughout the session and many more throughout the next trading sessions. Opportunity exists in the market all of the time.
Remember: No one trade should make or break your performance for the day. Don’t 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 thirty Nifty points, then do not allow a losing trade to exceed those thirty 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 : I suggest you to actually write down the specific market prerequisites (setups) that must take place in order for them to make a trade. I don’t necessarily care what the methodology is, but I want tou to make sure that you have a set of rules, market setups or price action that must appear in order for you to take the trade. You must have a game plan.
If you have a proven methodology but it doesn’t seem to be working in a given trading session, don’t go home that night and try to devise another one. If your methodology works more than 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 200 lot on any individual trade (and I made a net loss of over 6 lac that day). Sure, I would love to be able to trade like colleagues, and friends who were regularly trading 100 or 200 lots per trade. However, I didn't possess the emotional or psychological skill set necessary to trade such a big size. That’s OK. I knew that my comfort zone is 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 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 broker will not allow you to continue unless you add more funds in your account.
I suggest you to place daily downside limits on your performance. For example, your daily loss limit can never exceed Rs. 5000. Once you reach the Rs. 5000 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 Rs. 2,50,000 equity in their trading account that they somehow have the right to trade five or ten Nifty lots. This cannot be further from the truth. If you can’t trade one lot successfully, what makes you think that you have the right to trade 10 lots?
Ask your spouse to demand you to show them a trading profit over the course of ten consecutive trading days trading one lot only. When you have achieved a profitable ten-day period, in my eyes, you have earned the right to trade two lot for the next ten trading sessions.
Remember: if you are trading poorly with two lots you must lower your trade size down to a one lot.
10. GET OUT OF OF YOUR LOSERS : You are not a “loser” because you have a losing trade. You are, however, a loser if you do not get out of the losing trade once you recognize that the trade is no good. I bet, It will amaze you, how accurate your gut is as a market indicator. If, in your gut, you have the idea that the trade is no good then it’s 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 don’t 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 it’s best to exit immediately. “It’s never a loser until you get out” and “Not to worry, it’ll come back” are often said tongue in cheek, by traders. 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 HOPE AND PRAY. IF YOU DO, YOU WILL LOSE : When I was a new and undisciplined trader, I can’t tell you how many times that I prayed to the “God.” My prayers were a plea to help me out of a less-than-pleasant trade position. I would pray for some sort of divine intervention that, by the way, never materialized. I soon realized that praying to the “God” or any other “futures god” was a wasted exercise. Just get out!
13. DON’T WORRY ABOUT NEWS. IT’S HISTORY : I have never understood why so many traders listen to or watch Financial TV Channels all day long. The “talking heads” on these programs know very little about market dynamics and market price action. Very few, if any, have ever even traded one lot in any exchange. Yet they claim to be experts on everything. They can't provide any utility to you. Treat it for what it really is... entertainment.
14. DON’T SPECULATE. IF YOU DO,YOU WILL LOSE : In all of the years that I have been a trader and associated with traders, I have never met a successful speculator. It is impossible to speculate and consistently get large winners. Don’t be a speculator. Be a trader. Short-term scalping of the markets is the answer. The probability of a winning day or week is greatly increased if you trade short term: small winners and even smaller losses.
15. LOVE TO LOSE MONEY : What I mean is to accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly. It will save you a lot of trading capital and will make you a much better trader.
16. IF YOUR TRADE IS NOT GOING ANYWHERE IN A GIVEN TIME FRAME, IT’S TIME TO EXIT : This rule relates to the theory of capital flow. Trading capital pushes the market one way or another. An oversupply or imbalance of buy orders will push the market up. An oversupply of sell orders will push the market down.
When prices reached stagnation point (as typically happens many times throughout the trading session), the market and its participants are telling us that, at the present time, they are happy or satisfied with the prevailing rates.
You don’t want to be in the market at these times. The market is not going anywhere. It is a waste of time, capital and emotional energy. It’s much better to wait for the market to heat up a little and then place your trade.
17. NEVER TAKE A BIG LOSS. ONLY A BIG LOSS CAN HURT YOU : Big losses prevent you from having a winning day. They wipe out too many small winners that you have worked so hard to achieve. Big losses also “kill you” from a psychological and emotional standpoint. It takes a long time to get your confidence back after taking a big loss on a trade.
18. LEARN TO EXIT FROM YOUR WINNERS : The net effect of exiting out of your winners will be an increased average win per trade while keeping your losses to your pre-defined risk parameters.
You should never average out your losers, They say never catch a falling knife. If your trade size is more than one lot and your trade is a loser, you must exit the entire position. If your trade size is more than one lot and your trade is a winner, it is best to exit half of your position at your first price target.
If you trade with protective stop-loss orders, you should modify the order to reflect the change in trade size (remember you have exited half of your position) and raise or lower the SL price, to your original entry price. You now are essentially at a winning side. You can’t lose on the remaining position, and that’s obviously a fantastic position in which to put yourself.
19. 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 don’t get paid in this business unless we put the trade on. Don’t overanalyze the trade. Place the trade and then manage it. If you’re wrong, get out. But you’ll never be right unless you are actually in the trade.
20. IT’S THE MARKET ITSELF THAT WIELDS THE ULTIMATE SCALE OF JUSTICE : The market moves wherever it wants to go. It does not care about you or me. It does not play favorites. It does not discriminate. It does not intentionally harm any one individual. The market is always right.
You must learn to respect the market. The market will mercilessly punish you if you do not play by the Rules. Learn to condition yourself to play by these Rules of Trading and you will be rewarded.
Happy Trading.
#Stocks #mustread Traders Psych Post ::Trade with Discipline http://jameelblr.blogspot.in/2012/02/traders-psych-post-05feb2012-2-success.html
No comments:
Post a Comment