We hear the word discipline a lot when people talk about trading philosophies and trading psychology. Most of us heard the word a lot in our formative years too. The concept is the same. Discipline when you were younger might have meant getting up early to do your morning paper route, making sure to do your chores before breakfast, or being on time for school.
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Many people learned a higher level of discipline in the military or when they had children of their own to worry about and supervise. For some people discipline may mean limiting oneself to a couple of beers at the ball game or to two martinis while out with the girls.
Discipline in trading is very similar. It means not throwing good money after bad and not succumbing to the rush of making fast money. This is particularly important after a trader has had a profitable streak. You will find that once you've had a profitable trade or a string of profitable trades, you miss not being in the market. You also may start to think that because you have this cushion of profit, it's easier to take risks. When you recognize this behavior, it should set off alarm bells. Disciplined traders wait patiently for their setups and treat the risk the same way regardless of the outcome of their last trade or their last 10 trades. The same traits people exhibit in their professional and social lives will show up in their trading habits.
The good thing about discipline, as any drill sergeant will tell you, is that it can be taught. Often the hardest things for people to do are to have the discipline to evaluate themselves honestly and identify their weaknesses. If they can come to terms with that and come up with a plan to discipline themselves, they are on their way to becoming successful in more than just trading.
To simplify things, remember that the only goal a trader should have is to have the discipline to follow her trading plan, which we will be covering shortly. Discipline also means always using a stop-loss order, which is an order that is entered after you initiate a position that automatically will take you out of that position with a loss if the market moves against you.