Disciplined trading is a key factor in achieving success in the financial markets. In this article, we will explore a three-step approach recommended by a seasoned trading expert with over 45 years of market experience. By following these steps, traders can develop a systematic and rule-based approach, gain confidence in their strategy, and ultimately cultivate the discipline needed for consistent trading performance.
Step 1 – Methodology: Finding a Proven Strategy
The first step towards disciplined trading is to identify a methodology or strategy that has been rigorously tested and proven to be effective. It is essential to seek a rule-based approach that can be objectively programmed into a computer, as this eliminates subjective interpretation and ensures consistency.
Beware of strategies that lack clear and well-defined rules, as they tend to produce inconsistent results. It is crucial to dedicate sufficient time and effort to complete this step accurately. Failing to do so may result in a series of losses, which can erode confidence and lead to abandoning the strategy prematurely in search of a new one.
Step 2 – Confidence: Understanding and Testing the Strategy
The second step involves gaining confidence in the selected strategy. This entails a deep understanding of how the strategy works and why it generates profits. Carefully examine backtest results, identify the market conditions where the strategy performs best, and consider paper-trading or trading with a small position size to gain practical experience.
This process should not be rushed. Mere knowledge of the strategy’s rules and backtest performance does not guarantee success in real-time trading. The transition from theoretical understanding to practical execution can reveal significant differences and challenges. Thus, it is vital to gradually develop confidence by carefully assessing the strategy’s behavior with real market conditions and limited risk exposure.
Step 3 – Discipline: Strict Adherence to the Strategy
The third and final step is to embrace discipline by strictly adhering to the trading strategy. This step is of utmost importance, as deviating from the established rules can undermine confidence and render the strategy’s results invalid.
Resist the temptation to constantly tweak the strategy based on a few trades or short-term results. All strategies experience both winning and losing periods, and it is crucial to view performance over a significant number of trades to capture the inherent edge. By faithfully following the strategy without impulsive changes, traders can allow the strategy’s statistical advantage to work in their favor.
If the urge to modify the strategy or difficulty in executing trades according to its rules persists, it indicates a lack of confidence in the methodology. In such cases, it is advisable to stop trading the strategy and revisit steps 1 and 2 to reassess and rebuild confidence before proceeding.
Disciplined trading is a journey that requires a systematic approach and a commitment to following a proven strategy. By carefully selecting a validated methodology, gaining a deep understanding of its mechanics, and exhibiting unwavering discipline, traders can increase their chances of consistent profitability in the financial markets. Remember, trading success is not solely defined by a single trade, but rather by the collective application of a well-executed strategy over a substantial number of trades.