Trading Discipline

One of the questions that I’m most frequently asked is – “what does it take to become a successful trader?”

The truthful and somewhat disappointing answer to that question is both simple and obvious – it takes discipline and hard work.

While adverts and promos for online trading platforms highlight the glamour of McMansions, super cars and a jet-setting lifestyle, the tedious truth is that traders need to be devoted, dedicated and disciplined. Boring but undeniably true.

Discipline means controlling losses, a fact of life for any trader in any market. It’s how you deal with those losses that matters. All professional traders observe an inviolable tenet – run profits and cut losses – and the latter comes first.

How do traders do this in practice? They employ “stops” – stop loss orders that limit their exposure to the market. Here’s a simple example.

Let’s say we’re bullish on oil – we expect the price of crude to increase. We buy Brent Crude Futures at a price of $80. If the price increases – as we expect – then we’ll make money. But what about if the price falls? What if we’re wrong?

We need to limit our potential losses – so we place a stop loss order. At the same time that we buy futures at $80 (because we’re bullish) we place a stop-loss order to sell those futures at (say) $78 – just in case we’re wrong in our market view – and to limit our downside. In this way traders can limit losses and exit losing positions at a predetermined price level.

As to the “running profits” side of the equation – pro traders not only run profits but often add to winning positions – increasing the size of trades as the market moves in their favour.

This fundamental tenet of trading – running profits and cutting losses – is observed faithfully by pros but amateurs all too often do exactly the opposite – taking profits too early and allowing losing positions to run in the hope that things will turn around.

And so – to return to the question of that which it takes to become a successful trader – the answer is – amongst other things – discipline, specifically in relation to profits and losses. Run profits, cut losses!

Author: Bill Beagles, Head of Training, Professional Trader Qualifications & Development, ZISHI

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