Trading the Markets: Discipline

We’ve talked about fear and greed before in this series, you can check out those articles here and here. Let’s talk about the one thing without which no one can ever succeed in financial markets, whether they are an investor or a trader: discipline.

Discipline is particularly important, because, in the absence of it, you might make occasional profits, even big ones, but you won’t be able to control yourself and then go on and lose it all (and more most probably). So let’s talk about how you can go about creating this discipline I’m talking about.

1. Create a trading plan and stick to it. A trading plan means you take trades only according to pre-set criteria that you already have backtested financial data for. And since it is your own rules, you don’t need to second guess it and can act without fear. You sometimes might get profits by swinging it, but the habit that might trigger is dangerous, and more often than not leads to blowing that money.

2. Accept losses. I heard YouTuber and trader Albert Burgess say this once, “Losing is not the same as defeat.” While I think, this more applies to trading or other things as a whole, we can bring something from this statement here. You need to accept that losing some trades is not only probable, but mostly a sure thing. And since you have a backtested trading plan, you know that you’ll be profitable in the end.

3. Stay away from “popular” stocks and trends. Most of the time, what happens is the big players have already gotten into stocks at low prices and when they want to get out of their positions, those stocks or industries are laden with good news and everyone in sight starts recommending them. Recently, the US market has been heading higher and a new bull market has been proclaimed by many people, but many of the big stocks have seen a significant amount of insider selling, and these “insider” guys definitely know more than you and me. I’m not saying this one instance is definitely the scenario I put forward above, it just goes to show that not all is what it seems.

4. Don’t fall in love with particular companies. Since we are emotional beings, we tend to get swayed sometimes. This happened to me too, I held the first stock I ever bought from Rs. 100 to Rs. 400 and saw that it showed topping signs there. My plan would have told me to get out of at least half of the position, but I couldn’t get myself to. I had to sell the entire thing at Rs. 300 a few days later. So don’t make this mistake, the stock doesn’t owe you anything because of your attachment to it.

5. Don’t count your chickens before they hatch. Some people get excited after seeing their “paper” profits (the profits that are theoretical still because the position hasn’t been sold yet). Never make this mistake. You have not made a profit before you see the money in your trading account or bank account. Paper profits make you go into comfort mode and you are bound to make mistakes if you’re not on alert. The best practice I can recommend here is to not look at the paper profits for ongoing trades, look only at the prices involved in the trade so you know what’s what.

6. Don’t second-guess your targets and stop losses. Both of these things are set by you for some reason (to book profits where you see fit or get out of the trade with an acceptable loss). But when the time comes, we tend to get greedy for more profits or hopeful for smaller losses and stay in the trade. Don’t, nothing good comes of it.

So what happens if you stray from the disciplined path?

1. Overtrading. If you don’t accept eventual losses, you would run to make it even. Plus, your mind should be at its full potential for you to be able to trade well. For example, I’ve found that after 2 or at the max 3 trades in one day, my mind just doesn’t work all the way and I take weird trades that I wouldn’t normally take. Find out your limit and try never to go past it.

2. Chasing trades. It sometimes so happens that the stock we were waiting to come a bit down for us to buy never actually comes there and just goes berserk. For example, I’ve had a stock go from Rs. 72 to Rs. 500 within weeks when I was just waiting for it to come to Rs. 70. But I’ve also had the reverse happen. I wanted to buy a stock between Rs. 6 and Rs. 6.5 but it went to Rs. 8 before I could be sure of the decision. I bought it at Rs. 8 to not miss the bumper move. What happened next was that it went to Rs. 6 and I got out there in a panic, but then it went to Rs. 30 later. Both are real stories, I’ll tell the company names if you ask. But the point is if instead of chasing I had waited to buy it at Rs. 6, I wouldn’t have had to sell it and got the whole of the return. Sure, you’ll miss eventual profits as I did in the first example, but a stock going up in a straight line really doesn’t happen all that regularly.

3. Uninformed and careless trades. It is your job to research every trade and decision before pushing on the buy or sell button. You should never be in a situation where you bought a stock with half/biased information and then are figuring out what the company actually is worth. You should have all the information regarding the entry & exit and know the value of the stock according to all of the available and relevant information. All of this can only be in your control when you follow your plan and take trades only according to your set criteria.

So stay safe, stay disciplined and read all my articles here. And do let me know if you want a specific topic covered! Subscribe for free to receive new posts and support my work.