Think Like A Trader Blog

Thursday, 23 July 2015

How to Build Discipline in trading Forex and Indices and Conquer Emotional Trading

One of the best ways to build discipline is also one of the easiest ways. If you struggle with revenge trading, overtrading, chasing the market or any of the other myriads of crazy actions that you just cant seem to curb, then this will help.

Now you’re all expecting some mythical strategy involving chimes, meditation, a vegan diet and connecting to your inner peace.  So when I tell you to start a simple trading diary, you’re probably wondering what I’m talking about? A diary? I’m losing money here, getting trapped in emotional trading. I need something more than a trading diary.

But it works. A simple trading diary. Each day, after ALL trades, you note down the trade in your diary – I find hand writing is more beneficial than typing into a computer. You explain your trade – namely, why you took it. You explain your exit. And then you rate your trade from 1 to 5, 5 being a perfect trade.

There’s a little catch though – your trade can be a loser and still rate a perfect 5. Because you’re rating yourself in this diary. It’s an evaluation of YOUR performance, specifically did you stick to your trading rules or not? If you revenge traded or if you tried to chase a trend, you write that down in the diary. You berate yourself and you rate it as a suitable failure. Moved your stop or didn’t take your exit and instead watched the market turn against you? Rate it appropriately.

Why does this help? Because there’s a problem in trading and that is that there are no rules. It’s just you and your trading platform. You can do whatever you like. Sure it hurts when you lose money but at the time that doesn’t enter your head. Instead you worry about making the money back or not missing this one, ultimate trade even though there’s no entry signal.

The diary makes you accountable to someone. It makes you accountable to yourself, and trust me, there is no harsher critic. Once you start writing it down and evaluating your trades, you’ll find that before long you want to avoid writing in the bad trades. But you must keep doing it. Tear yourself apart in those entries. And what happens? You’ll find yourself pausing before taking those silly trades in the future. A new voice will speak up in your mind and say ‘hey, wait a second, are you SURE you want to be documenting this trade after it’s done?’

The bad trades will begin to slip away. I use this method and it works because I follow it to the letter. Instead of fearing missing trades I began to fear writing about bad trades. Because I could see the stupidity, right there on the page. And so I found myself pausing before each entry, evaluating, sifting out the emotional trades.

But remember, you’re evaluating yourself, not the results of the trade. If after the trade you did everything you were supposed to and it lost, give yourself a perfect 5. You can’t control the market or probabilities. But you can control yourself.

I’m in a trade right now. My trading diary is always on my mind (it’s actually on the desk next to me!) I’m accountable to myself and I definitely don’t want to face that criticism!

Happy Trading and I hope you’re having a great week.

No comments:

Post a Comment