3 Proven Ways to Improve Trading Discipline

You know you should’ve taken the loss there. But you froze, told yourself it would reverse, and it kept going. You said last week this would be the last time this would happen. But here you are, staring at another massive trading loss. You know what you’re doing wrong, but you don’t have the trading discipline to fix it.

Self-discipline in trading doesn’t just apply to keeping losing trades small. Waiting for a setup where you have an edge, holding for profit targets, and sizing correctly are other areas where many traders struggle maintaining self-discipline. 

Discipline is the difference between a winning and losing trader. Here 3 effective ways to improve self-discipline in trading:

Have Defined Trading Rules

This is not new advice. But yet so many traders don’t have defined, written out trading rules in front of them while they trade. When the pressure of trade is on, it is easy to stray and lose discipline when you don’t have written rules in front of you to keep you in check.

Trading rules are designed to protect you from yourself. Here are examples of some trading rules I have:

– Never average down on a losing trade

– No new day trade positions after 11 am 

– Don’t short stocks with less than 5 million share float

– Stop trading after 3 consecutive losing trades

– Stop trading when daily max loss is hit

– Never risk more than 3% of the trading account on a single trade (number will vary based on account size and trader’s risk tolerance)

– Write out a trading plan before putting on any trade

Trading is one of the few professions that have little structure and few rules. You make all the rules and all the decisions. You need to have rules that protect you from your weaknesses and allow your strengths to flourish. 

Have A Written Trading Plan

Once you get into a trade, it easy to let emotions and price action get the better of you. Having a written trading plan allows you to stay in control, let the trade play out, manage your risk, and not get shaken out. Here is what your trading plan should include: 

I recommend keeping these trading plans just as simple as above. The more complicated the trading plan, the more thinking you have to do in the trade. Ideally, once you’re in the trade, most of the hard decision making is done, and now you are just executing. Here is an example of my trading plan that I had on $CRWD today: 

My trade thesis was that it was a recent IPO with a recent earnings breakout, which is a high probability play for a long for me. It had sold off and pulled back on Friday when it gapped up in response to the strong earnings. My first long trigger was the opening range breakout over the $84 level (I anticipated a bit, oversized also had to take off a few to keep my emotions in check!). Stop would go at $81.39, under low of day (wide enough to avoid getting stop gunned).

My main profit target was Friday’s high of day $85.85.  Plan was to take off half at Friday’s HOD, and then scale out the rest of my position. I had the discipline to hold for my profit target but did not have the discipline to wait for the entry trigger. While I did get in at lower prices, the higher probability entry was over $84. Sometimes you are not punished by the market for mistakes like this, sometimes you are. The outcome of the trade doesn’t always mean you did everything correctly.

Build Discipline Outside of Trading

The habits you build outside of trading carry over into trading, and vice-versa. If you live a lifestyle where you don’t have a disciplined exercise routine or a diet, it will be difficult to be disciplined in your trading because you’re just not used to disciplined behavior. 

Self-discipline is simply the ability to train yourself to abide rules or a code of behavior. It usually involves conditioning yourself to do something that you don’t want to do. Very people are naturally good at trading. Being a good trader is usually doing the opposite of what all of your instincts want to do. 

It doesn’t have to be exercise or health necessarily, although I’d recommend it to be. It could be as something as simple as waking up at 6 am every day. You need to be used to getting yourself to do things that you don’t want to do, but you know they need to be done in order to achieve your goals, whatever they may be. Build disciplined routines in your life outside of trading, and they will carry over.

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