Steps To Become A Disciplined Trader
Forex, and trading in general, is different when compared to other professions in that you can teach somebody how to make consistent profits, but they can still lose money.
How is that possible? Most traders lack the discipline to execute consistently and with no subjectivity. As a result, they are left disappointed with a consistently declining equity curve.
Not all is lost, there are ways to fix this, which is why this post will give you the steps you need to become a disciplined trader. Some of them you may have already mastered, some not, but there is room for improvement for every Forex trader out there.
Here is an overview of the steps, then each point will be discussed in detail:
- Have a trading strategy/ methodology to follow.
- Backtest and gain confidence in your strategy.
- Follow the rules of your system.
- Understand and trust the probabilities.
- Be process orientated.
- Manage risk.
- Gain an understanding of psychology.
- Keep track of your performance and progress.
- Develop discipline in other areas of life.
Down to the details
1. Have a trading strategy/ methodology to follow
Foremost, to become a disciplined trader and by extension a profitable trader, you will need a strategy that can be executed consistently. Without a defined approach it is impossible to analyze your trading and make improvements.
It’s the equivalent of being an F1 driver with a blindfold. Having a strategy gives a trader definitive rules to follow, without this a trader cannot achieve any form of objectivity and consistency. Without a plan all you will get is a bunch of random results, you may as well play the lottery instead of trading.
By adding rules imposed by a strategy, it is less likely that you will fall victim to the psychological challenges of trading.
2. Backtest and gain confidence in your strategy
Backtesting can determine if a strategy has a positive expectancy, but it can do much more than that. Backtesting also allows a trader to gain confidence in their strategy and how to execute it, this confidence leads to greater discipline in following a system. that brings us to the next point.
3. Follow the rules of your system
It sounds stupid, don’t traders want to become more disciplined so they can follow their systems? Well yes, but the reason I am listing this is that… by following the rules of your system, you will reinforce good habits, and executing your system will become second nature.
The best way to become disciplined in the execution of your system is to create a list of rules that you must follow when trading. By doing this you take control of your emotions and can execute to perfection.
4. Understand and trust the probabilities
Trading is a probabilities game, once you have a system with a positive expectancy, trading becomes purely psychological. Meaning all you have to do is execute your system and in the long run, you will make money.
This is why it is important to trust the probabilities when your system is on a losing streak and keep trading the system objectively, without changing it because if you do you could break a positive system.
When the losing streaks come along the only way to maintain discipline in trading is to know the probabilities and trust that it will eventually balance out in your favour.
5. Be process orientated
Being a disciplined trader comes from following consistent processes, this also ties in with following your system rules, which may include the following:
You may structure their time in a specific way in a day, to remain focused and productive towards a specific task, by doing this a lot more can get done and trading progress happens faster.
Another great way to remain process-driven is to have a step by step process in your analysis of the markets. For example, if you are a technical analyst you might start with larger timeframes and look for important support/resistance zones, then move to lower timeframes to look for entry opportunities.
You can experiment to find the best processes for your trading results, but the one that is consistent among all successful traders is you must have a process in place when executing your system, including the rules we mentioned earlier so that you stay focused and disciplined when trading.
6. Manage risk
Managing risk is an essential part of discipline in trading. But it also works both ways, if you manage risk incorrectly then you are less likely to remain disciplined.
Why do I say that? Because if too much money is put at risk and a series of losers come along, the psychological effect of this is detrimental to trading. This will make you question your approach and system and you may even commit a trading sin and change your approach, now that’s the opposite of trading discipline.
It’s not a system at fault! It is the trader risking too much of their money bag. How do we prevent this? Employ the same approach as executing your system, have objective risk limits and guidelines so that you bet with your head and not with your feelings.
Make sure that you manage risk correctly and remember that it is just as important as following your approach with discipline.
7. Gain an understanding of psychology
Understanding your thoughts and emotions is required to become a consistently profitable Forex trader. To be disciplined one needs to control their impulses and feelings to make sure that their trading strategy is being executed objectively.
How can you understand this topic? It starts with educating yourself about the psychology of the market and the emotional traps that most traders fall into, by doing this you will quickly recognize when any of these issues are present in your trading.
This is the second part. You need to become self-aware of the psychological weak spots that you have (everyone has something) and how they manifest in your trading. After gaining knowledge on what your weak points are, you can then work to correct them and by extension improve your discipline.
To learn more about trading psychology the best way to start is through reading articles and books.
8. Keep track of your performance and progress
A great way to maintain your discipline as a trader is to keep track of your results and progress, by doing this you gain extra motivation to stay disciplined. Why have I distinguished performance and progress separately?
By performance I mean you should review how well you have objectively executed your system by following the rules that you set out. To do this, keep a record of all the times you didn’t follow your system e.g. not taking a trade, increasing the size of your stop-loss or risking too much.
By progress, I am referring to the improvements that you make regarding the issues you have found in your trading. If you find it difficult to take losses, but then take a series of losers without breaking your system, then list that improvement. If you wanted to work on managing stress in your trading and have improved, then keep a record of this.
Keeping track of your faults allows you to identify the issues in your trading and calling yourself out when you falter, helps to keep the motivation to break bad habits and stay disciplined. By contrast, when keeping track of your progress, you reinforce positive behaviours which help maintain discipline.
9. Develop discipline in other areas of life
One of the many observations that a trader will make after years of trading…other aspects of your life filter into your trading i.e. if you are not disciplined in other areas of life, you will find it difficult to be disciplined in the Forex market.
So, build positive habits in other areas of your life and you will find it far easier to follow your trading approach and be consistently profitable.
Discipline! We know we need it in our lives and our trading, but it still so difficult to maintain it. But the thing about discipline is it can’t be wished for, methods to manifest discipline are required. If you follow the steps in this article you will be a much-revered disciplined trader.
Bring on those disciplined profits.