SECTION#2: DISCIPLINE-HOW TO CONTROL YOUR EMOTIONS WHILE TRADING
Without the discipline to follow your trading plan, everything goes out of the window. For an overview of why traders lose discipline, read this FX Trader Magazine article discussing the ideal trading state. Be sure to work through the questions towards the end. They help work out your trading issues. But before we go any further, are you sure you are experience a psychological/discipline issue?
To trade profitably, first, you need a trading edge. But it is not sufficient. You also need to handle your emotions well enough to execute your trading plan. But do not conflate the lack of discipline with the lack of a trading edge.
The article from Optimus Future’s blog takes an unusual but frank angle to trading discipline. It does not hail psychology as the panacea. Instead, it points out the lack of control as a symptom of a lack of market understanding. In a similar vein, Dr.Brett Steenbarger also points out a hidden cause of trading psychology issues.
They key here is that you must first have a firm hold on your trading edge. That is the objective prerequisite. No amount of psychological advice can help if you’re not confident of your trading edge. But how can you build confidence?
Gain Confidence In Your Technical Skills
The best way to gain confidence in your trading plan is to trade it.
But without informed confidence, you should not start to trade.
How Do We Get Out Of This Conundrum?
The answer is paper trading. Some traders look down on paper trading, thinking that they are a poor copy of the real experience. Yes, there are definitely gaps between paper and actual trading. But you can minimize these gaps by following the rules in this article. After grasping the ground rules of realistic paper trading, select a simulator platform here, and start honing your technical trading skills.
If you cannot achieve consistency in paper trading after repeated attempts, your personality might be incompatible with your trading plan. Work through this short exercise to learn more about your trading personality. Then, consider if other trading approaches are more suitable for you. Once you are confident that you have a winning strategy, and all that’s holding you back are psychological issues, move on to the following.
Control Your Risk
Over-leveraging and risking too much is the easiest way to mess with your emotions.
There is no reason to neglect risk. By controlling your risk, you are protecting both your financial and emotional capital.
Always use a sensible position-sizing model. If you already have one in place, stick to it without exceptions. If not, read this article to learn three basic models you can apply right now.
This article tackles both financial and psychological risks. They are intertwined. To get a broad foundation in risk management, start with this module from Zerodha Varsity.
Exercise Patience
A patient trader is a disciplined trader. If you want to improve your trading mindset, learning to be patient is a practical first step. Go through this article to appreciate how patience affects trading discipline.
Skim through this interview with Jack Schwager, who highlighted that doing nothing requires the patience of a saint. This guide brings you through the steps you can take to become a more patient trader.
SECTION #3: DEALING WITH EXTREME OUTCOMES
Your trading psychology is critical during extreme events. Here, we’ll look at the two extreme circumstances for traders: losing and winning.
Losing Streak
Losing streaks happen to every trader at some point. Some traders fall into a downward spiral, but others recover with a fresh perspective. If you are prepared for them, you stand a higher chance of being in the latter group. This is an article I wrote after reflecting on how I dealt with and recovered from consecutive losses.
Look at the diagram in this short article on Seeking Alpha. It shows how your thoughts, emotions, and actions are interrelated. In this short and sweet video, Mike Bellafiore talks about overcoming a painful trading loss using the 1-hour rule. It is a simple but effective rule.
Winning Streak
Winning streaks are easier to handle. But it’s common for traders to neglect to prepare their minds for success. Hence, winning streaks can prove to be more dangerous than consecutive losses.
Winning a lottery is not exactly like trading profitably. But these tales of bankrupt lottery winners demonstrate the need to plan for success, both financially and emotionally.
Hubris is the downfall of many trading legends. They grew big and arrogant, and they crashed.Learn to tell the difference between confidence and hubris.
If you’re aware that success can get to your head, you are already ahead of the pack. This article on Medium offers a few more reminders on what to do after achieving success.