Here are the key components of any trading plan:
- Determining position size: How large a position will you take for each trade strategy? Position size is half the equation for determining how much money is at stake in each trade.
- Deciding where to enter the position: Exactly where will you try to open the desired position? What happens if your entry level is not reached?
- Setting stop-loss and take-profit levels: Exactly where will you exit the position, both if it’s a winning position (take profit) and if it’s a losing position (stop loss)? Stoploss and take-profit levels are the second half of the equation that determines how much money is at stake in each trade.
And no matter how good your trading plan is, it won’t work if you don’t follow it. Sometimes emotions bubble up and distract traders from their trade plans. Other times, an unexpected piece of news or price movement causes traders to abandon their trade strategy in midstream, or midtrade, as the case may be. Either way, when this happens, it’s the same as never having had a trade plan in the first place.
Developing a trade plan and sticking to it are the two main ingredients of trading discipline. If we were to name the one defining characteristic of successful traders, it wouldn’t be technical analysis skill, gut instinct, or aggressiveness — though they’re all important. Nope, it would be trading discipline.
Traders who follow a disciplined approach are the ones who survive year after year and market cycle after market cycle. They can even be wrong more often than right and still make money because they follow a disciplined approach.
Taking the Emotion Out of Trading
If the key to successful trading is a disciplined approach —developing a trading plan and sticking to it — why is it so hard for many traders to practice trading discipline? The answer is complex, but it usually boils down to a simple case of human emotions getting the better of them. Don’t underestimate the power of emotions to distract and disrupt.
So exactly how do you take the emotion out of trading? The simple answer is: You can’t. As long as your heart is pumping and your synapses are firing, emotions are going to be flowing. And truth be told, the emotional highs of trading are one of the reasons people are drawn to it in the first place. There’s no rush quite like putting on a successful trade and taking some money out of the market. So just accept that you’re going to experience some pretty intense emotions when you’re trading.
The longer answer is that because you can’t block out the emotions, the best you can hope to achieve is understanding where the emotions are coming from, recognizing them when they hit, and limiting their impact on your trading. It’s a lot easier said than done, but keep in mind some of the following to keep your emotions in check:
- Focus on the pips and not the dollars and cents. Don’t be distracted by the exact amount of money won or lost in a trade. Instead, focus on where prices are and how they’re behaving. The market has no idea what your trade size is and how much you’re making or losing, but it does know where the current price is.
- It’s not about being right or wrong; it’s about making money. The market doesn’t care if you were right or wrong, and neither should you. The only true way of measuring trading success is in dollars and cents.
- You’re going to lose in a fair number of trades. No trader is right all of the time. Taking losses is as much a part of the routine as taking profits. You can still be successful over time with a solid risk-management plan.
