How Can Traders Improve Their Trading Discipline

How Can Traders Improve Their Trading Discipline


Discipline is undoubtedly one of the most important character traits a trader needs to have in order to trade successfully. A lack of discipline often the cause of the most common trading mistakes such as breaking trading rules and executing trades prematurely, making impulsive trading decisions, violating risk management rules, revenge-trading and over-trading, just to name a few. And, all of these things inevitably result in losing much more money than what a trader had originally anticipated and what would be necessary.

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Developing discipline is usually not an easy task and discipline in trading can come in many different forms which most people are not even aware of. In the following article we explore what discipline in trading really means and how a trader can develop more of it by following a few simple tips.



Psychology of Trading, Discipline


Knowing what to do vs. actually doing it

You know you should be going for a run, instead of watching the new episode of Lost with a bag of chips if you want to lose some weight; you know that studying a few more hours instead of meeting your friends at the bar will have a big impact on your grades and you know that you should get up a bit earlier instead of hitting the snooze button 5 times to avoid the daily morning stress.

The same applies to trading. You know that staying out of the market more often will protect your capital if you don’t see a valid trade entry, but you still execute your trade prematurely and end up with a loss; you know that trading with a stop loss and not manipulating it will make sure that your losses don’t get out of hand, but you  still widen your stops regularly because you believe that price has to turn around eventually; and you know that sticking to one trading method and trying to master it would help you become a better trader faster, but you still cannot stop “system-hopping” and change systems regularly hoping to stumble over the Holy Grail.

Everyone usually knows what the ‘right’ thing to do would be, but following through and actually doing it is much harder. Unfortunately, there is no trick that will suddenly turn you into a disciplined person and will make doing all those seemingly hard and uncomfortable things easy and fun. However, there are a few tips that can help you build a more disciplined trading approach step by step:


#1 A trading plan

In a trading plan, you plan your trades ahead of time. Before you start your trading session, you sit down and analyze your instruments and create specific trade scenarios and map out potential trade ideas. You also write down things that need to happen in order for you to take a trade. Then, when the markets open, you simply wait for these things to happen before you execute your trade.

A trading plan will help you build discipline because it makes committing to impulsive trading mistakes and entering trades prematurely less likely. When you see your trading plan in front of you and not all your criteria are met, you have to consciously break your rules and actively convince yourself that violating your trading plan is what you should be doing.


#2 A trading rules checklist

A checklist has similar benefits compared to a trading plan, but it serves as a great complimentary tool. A checklist states all your entry criteria underneath each other. Every time you are about to enter a trade, you revisit your checklist and check off the things you can see on your charts.

With a checklist, it becomes obvious right away if a trade really matches your criteria or not. Again, if you can visually see that the trade that you are about to take is violating your rules and that you should be staying out, you are more likely to avoid mistakes because you have to consciously convince yourself that breaking the rules is a good thing.

“If you commit the same mistake more than once, it is no longer considered a mistake. It’s a conscious decision.”


#3 Keeping a journal and reviewing your trades

Most traders will never look at their trades again after they have closed it. They will just move on to the next trade, forget about what they did before and completely avoid learning effects.

“We do not learn from experience …we learn from reflecting on experience.” – John Dewey

Keeping a trading journal offers two potential benefits. First, it provides a place where you can come back to and revisit all your past trades, see what you have done (wrong) and how you developed over time. And second, it will keep you from making mistakes during your trading sessions. If you know that you have to later enter your trade into your journal and write down that you made the same mistake AGAIN, you will think twice if it’s worth it.


#4 Physical reminders

This tip may sound unprofessional, but it is worth your while. Some traders report that by writing down their most commonly made mistakes and putting these physical notes next to their screen where they can see it at all time, they become more aware of their actions.


The levels of trading discipline

Not all previously discussed tips and tools may seem applicable to every trading system. Especially when it comes to discretionary and automated trading, the differences can be significant. A discretionary trader may find it difficult to write down a trade checklist or pre-plan his trades because he makes his decisions in the moment and does not have a set of fixed rules. But, discipline is not limited to trade entries and it encompasses a variety of different aspects. We now take a look at the typical areas in trading where a lack of discipline is most present and how a more disciplined approach can help you:



Even a discretionary trader can usually improve his trading by applying a more disciplined approach to risk management. Being certain about how much to risk on a single trade and not going beyond this threshold may limit losses and help him stay out of those trades where his undisciplined self wants to take over.

Cutting losing trades

This is a consequence of the previous point. Specific rules about how to set a stop loss order and when to cut losers is also possible for discretionary traders. Not letting losses get out of hand and having a fixed plan about how to execute your stop loss orders is a must for every trader.


Profit taking

When it comes to profit taking, there are two common problems. First, traders are too fearful and close trades too early and miss out on potential profits. And second, traders become too greedy and want to generate more profits by not closing winning trades and eventually giving back their profits. If you find yourself among these groups, creating rules about profit taking can help you build a more disciplined approach and avoid the common mistakes.


Limitations to discipline – audit yourself

Imagine that Michael Jordan would have pursued a financial career and applied for a hedge fund job, instead of playing basketball; we would probably never have heard of him. Or can you picture Warren Buffet as a professional race car driver? But even within a specific field, the differences between positions can be huge; a world class long distance runner may be a horrible sprinter because of the differences in physical attributes which are needed.

The same is true in trading and the differences between the different trading styles can be significant. Whereas swing-trading requires more patience before and during trades, a day-trader has to deal with emotions very effectively and move on to the next trade fast, even after realizing losses. A naturally more impatient and emotional unstable person may have difficulties following a discretionary trading approach and would probably do better by having a set of fixed rules or creating an automated trading strategy.

The point is, no matter how many tips you follow and tools you use for your trading, by building a trading strategy and style around your strengths and weaknesses, you could potentially remove some of the negative impacts that undisciplined trading has.

Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.


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