What is Mistake "Lack of Discipline" in Trading?
Let's say you are new to futures trading. Or let's say you have traded futures in the past without much success and have decided to start fresh with a new approach and a clean slate. And you've done it all and followed every step.
- Determined how much money you can truly afford to risk
- Opened a brokerage account with that amount of cash
- Settled on a diversified portfolio of markets
- Developed a trading system in which you have complete confidence
- Developed specific, unambiguous entry and exit criteria
- Back-tested your system and have generated good hypothetical results
- Walked your system forward, paper traded it over new data and have generated good results
- Sized your account so that you reasonably expect no more than a 25% drawdown
- Built in risk controls including stop-loss orders to minimize your risk
You're as ready as you can be. With high hopes and great anticipation you place an order to enter your first trade. So what happens next? Well, if you are like many traders the first three trades you make will be losses. After the first loss, you'll say "no big deal; it's part of trading." After the second loss you'll think "I wonder if I'm doing something wrong." After the third loss you'll tell yourself "something's wrong, and I need to regroup." You will have no idea why your system has suddenly fallen apart. So you decide to go flat and skip the next signal, a buy signal. Two days later the market that you should be long explodes to the upside leaving you in the dust. You tell yourself "it's too late to jump on board now, so I'll just wait for the next trade," relieved at least that your confidence in your system has been restored. So you wait for the next signal from your system. And you wait and you wait and you wait. And in the meantime that market continues to tack on gains virtually every day. Your system is doing great, but you on the other hand are not doing so well. You start mentally adding the money that you should have made on this trade to your account and say "I should have this much in my account now." But every day your account balance remains the same, while that market just keeps rising higher and higher. By the time you enter the next trade you have a missed a $5,000 winner. And the next trade is another loser.
If you are one of the lucky ones, at this point your loss is relatively small, you conclude that you are in over your head, and you decide that enough is enough. You close your account and walk away, joining that fateful 90%. For the rest of your life whenever the topic of futures trading comes up you step forward like a veteran with a purple heart and tell your "war story:" "yeah, I traded futures, listen to me kid ..."
Or maybe you don't quit so easily. If you are one of the unlucky ones, you keep trading, suffer more indignities at the hands of the futures markets, and lose even more money before your account is finally laid to rest. And so it goes for 90% of the people who enter the exciting world of commodities speculation.
Given all of the potential pitfalls that we have discussed so far it is easy to understand why the person who decides to "take a shot" and is completely unprepared fails at futures trading. But what about the trader in this example? He was completely prepared both financially and emotionally to do what was necessary to succeed and still he failed. Why does this happen to so many traders sincerely dedicated to "making it work?" In most cases it is because although they were very well prepared when they began their new trading program, somewhere along the way they failed to do what was needed. They failed to have the discipline to pull the trigger (or to not pull the trigger as the case may be), and they either suffered a loss or missed a huge profit. With many traders this can cause an emotional "domino effect" where the trader's primary focus is no longer on following his plan to achieve his long-term objectives. Instead, his primary objective becomes getting back at the markets for causing him to lose money or for taking off without him. Or maybe his objective is simply to get back to "break even" before walking away. Becoming bent on getting even is a perfectly natural response to a kick in the teeth. Unfortunately, it is also a sure-fire way to fail as a futures trader.
A lack of discipline is defined as failing to do what you should do in a given circumstance. There is probably not a trader alive, successful or otherwise, who has never suffered because of his or her own lack of discipline at some critical moment. What separates those who make money in the long run from the other 90% is: The financial and emotional capabilities to survive a breach in discipline. and The willingness to learn from mistakes and to never repeat a mistake already made. A lack of discipline in futures trading is always a mistake. This is true even if your lack of discipline actually saves you money by skipping a trade or exiting early, or if it allows you to capture a windfall profit by taking a trade against your approach, doubling up on a losing trade or holding on after your trading method tells you to exit. Imagine, you fail to follow your plan and you come out ahead. This leaves you ahead financially for the moment but consider where this leaves you psychologically: "I broke my own rules and made some money." All is well and good in the short run but what happens the next time a critical juncture is reached? Do you trust the approach that you spent so much time developing and refining (and which in the back of your mind "failed" you the last time around, while you, Mr. Supertrader, instinctively knew it was going to fail so you heroically took matters into your own hands and won the day), or your own "gut" instincts?
The most cruel paradox in futures trading is that a trader's short-term successes can plant the seeds of his long-term failure. Believe it or not, one of the worst things that can happen to a first time trader is to have great success right off the bat. In the long run you may actually be better off if you struggle a little at the outset, develop some respect for the markets and weather some early mistakes, than if your first three trades are big winners and you decide you've got "the touch."
Categories in Trading Mistakes
Lack of Trading Plan
Planning plays a key role in the success or failure of any endeavor
Using too much Leverage
Determining the proper capital requirements for trading is a difficult task
Failure to control Risk
Refusing to employ effective risk control measures can ensure your long-term failure
Lack of Discipline
A lack of discipline can destroy even the most talented and best prepared trader
Useful Advices to Beginning Trader
You can control your success or failure
All about Stocks
Encyclopedia about Stocks. That you should know about Stocks before starting
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