Thursday, October 06, 2005

The "D" Word

For months, the market has offered fewer intraday trend moves, and more intraday reversals with narrow ranges. Tuesday was such a day, with the morning being choppy but positive, and an intraday reversal that made bulls’ hooves curl. When this is the case, it’s always a good time to review your trading style as well as your discipline.

While it is very important to have a sound stock trading strategy, it is equally important to have discipline as a trader. The word discipline has been used many times in reference to trading, and many ignore it completely as an overrated weapon in the trader’s arsenal. After all, they see magazine ads or get junk mail advertising a trading system with an incredible track record that can solve all of their problems. However, it still takes discipline to follow a system, whether yours or someone else’s.

So, what are some applications for discipline? What will discipline do for a trader? For starters, it can allow you to stay in the game. A disciplined trader will not allow losses to snowball and wipe out the trading capital which is required to play the game of stock trading. Discipline can help a trader make money. If the idea is to “cut losses and let profits run,” then the disciplined trader allows those profitable trades to continue working. Human nature urges us to take profit when we see it, but we will rarely come out ahead in the trading game by giving in to such urges, so discipline can help. Discipline can also help the trader know when to trade and when not to trade. By having the discipline to make and follow a game plan, a trader can capture profits during markets which offer opportunity, and protect capital during times which do not.

How exactly does a trader go about “being disciplined?” First of all, make a game plan. Decide which markets you like to trade (stocks, forex, options, etc.). Get clear on which kinds of trades you prefer to take (breakouts, reversals, etc.). Determine a position size that fits your account and your personality, and plan to take trades only up to that size. Next, seek out trading opportunities. This may mean subscribing to a stock pick service, downloading charts and taking the time to manually search for setups, or just patiently waiting in front of your PC for something to come along which you can’t live without. Finally, once you have found the setups which meet your criteria, you’ve got to HIT THEM! You’ve got to be in it to win it, so don’t be afraid to try. If you are wrong, your trading plan is your safety net to limit your losses so that you can try again.

As traders, we’ll be wrong plenty of the time, so the idea is to stick with an approach which lets us stay in the game and find profits. A disciplined approach is the single most important aspect a trader must possess in order to profit over time. Whether you trade stocks, options, futures, or forex, whether you swing trade or day trade, whether you prefer reversals or breakouts, the common requirement for success in every market is discipline. Find trades that fit your game plan, and have the discipline to follow it.

The Stock Bandit


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