Tuesday, October 02, 2007

How you can reduce the effects of emotion and negative psychology?

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The answer is discipline! Without it you will lose.


Discipline in the following three areas of trading will ultimately determine your trading success.

Training

The successful trader never rests on past successes, or believes that his trading ability has peaked.

He is always learning, practicing his decision-making skills and honing them until they become second nature. Then he can react faster than a speeding bullet, but with the benefit of superior human judgment.

Trading Rules

The successful trader develops a set of trading rules - a plan - that he follows religiously. This guides his decision-making at all times. If a trader`s plan dictates that it is time to exit a stock, the trader will exit that trade and not wait a minute longer.

Self-Control

Successful traders display an extraordinary amount of self control.

Keeping emotions constantly in check, the disciplined trader is immune to the highs and lows that attend large market swings, whether panic, in a downturn, or of euphoria. I will show you how to learn the secrets of discipline.

These components may seem like a tall order. But that is exactly the point; trading is difficult work and serious business, demanding time, patience and a great deal of hard work. Master these components and you are on your way to success. Step off the straight-and-narrow path of discipline you will meet certain financial ruin.

The key message about discipline is that without it you will lose. It is that simple. You may think, "I understand and I will be disciplined in my trading." Nevertheless, this is where fear and greed enter into the picture. Shortly after this, an emotional rollercoaster ensures the stability of your character.

Can Discipline Be Learned?

The big question here is this: Can you develop the discipline you do not have naturally? I believe the answer is "yes, you can," but you must have the necessary commitment to do so.
Clearly, discipline can be developed. You only need to look at an army training program for confirmation of this fact.

However, it is one thing to have a vast and experienced organization bearing down on you and being prepared to do whatever it takes to make its point. It is quite another thing to do it yourself in the comfort of your own home, with all of the distractions of daily life.
Clearly, self-discipline is a requirement even to start this process.

Ultimately, undisciplined behavior is going to be punished by the market, either by direct losses or by the loss of profits which otherwise have been available.

Private traders who persevere do have external stimuli that will help the process. However, the market does not help as much as it might, because of the principle of random reinforcement. It is the market`s tendency to reward bad behavior from time to time.

This crucial fact is one of the reasons why it takes so long to learn how to trade. You need to realize there is no point in having a system if you are not going to follow it.

To speed up the process of learned discipline, you can read the book Dr. Alexander Elder, author of "Trading for a Living".

6 comments:

Futures Options Brokers said...

hello,

what is your trading rules ?

thanks
Futures Options Brokers
http://www.futuresoptionsbrokers.blogspot.com

M Trader said...

Hi Futures Options Brokers,

I do have a set of trading rules to follow and I'm traning myself to follow it strictly.

In brief, I don't trade with risk of more than 30% and I always use half of my account value to trade and keep the other half as cash.

I have sets of rules for my different strategies, please refer to my individual post for that.

I will discuss more on my trading rules in detail in the future. Please stay tune..

Cheers.

csy10 said...

Hi,
You have done well to document your trades and I have learnt thru your journal on where I have gone wrong in my own trades. Hope to pick up more great insights from your blog.

By the way, how do you scan for and select your potential trades? Especially "Earnings" and "Splits" related trades?

Happy trading!

-sy

M Trader said...

I'm please to hear that you benefited from my trading journal in one way or another.

For earnings related trades, there are a few criterias which I'm looking for:
1)Volume must be in millions;
2)The stock must closed above/below 22pma (60min chart) after the first hour of market open;
3) There must be enough room to move to the next support or resistance;
4)Enter 1 week before earning release.

As for split stock, the criterias are:
1) Stock with split ratio 2:1 or 3:1 only;
2) Volume in millions;
3) Closed above 22pma at the 1st hour of market open;
4) Stock price > $70;
5) There must be enough room to move to the next support or resistance
6) Enter pre-split only.

To your trading success.

Regards,
M Trader

Tony Chai said...

Hi M Trader :

Nice article about trading discipline. Most of the time this come with accumulation of trading experiences. But we must also learn from our trading mistakes along the way and remind ourselves not to commit them again.

Yours Truly,

Tony Chai
My Options Trading Blog

M Trader said...

Hi Tony,

Yup, I agreed with you that we must learn from our mistakes. I'm compiling my mistakes list and intend to post it here. This will remind me of not to commit them again.

Cheers.

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