Discipline is an important part of any day trading and investing process. It is a concept that makes it possible for a trader to make sound decisions in all market conditions.
Without discipline, a trader will often make popular mistakes such as not trading with a trading journal or opening trades without doing enough research.
In this article, we will look at the most important commandments for beginners that all discipline traders follow.
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Why is it important to be a disciplined trader?
Okay, the question is a good point. The short answer is: to allow you to day trading for a living, and not just trade as a hobby.
Being a disciplined (and prepared) trader will help you cope with whatever the market puts in front of you. Knowing in advance, for example, that a company will release earnings that week could help you generate lots of profits. Or, in case of unclear signals, avoid losing money.
In short, having discipline when trading in the financial markets has the main purpose of avoiding destroying your account or career after a few weeks (but also after years) because of a decision made (or avoided) at the right time.
The 10 commandments of novice traders
Know the game and its rules
Day trading can be compared to other fields like sports and medicine. To succeed in these industries, you first need to understand how it works and the rules that you should follow. For example, to be a successful golfer, you need to know how to hit the ball and the mistakes to avoid.
The same is true when it comes to the financial market. You need to ensure that you know the trading game and its rules. Some of the rules you need to know are:
- Always have a stop-loss for your trades (we’ll explain this later).
- Be careful on all overnight orders.
- Always consider the trade sizes of all your trades.
Most importantly, you should have information about how the market works. You can use free resources like websites and online courses to learn more about how the market works. Some of the top resources to use are Coursera and YouTube (a tip, follow TraderTv.Live).
Everything can happen in the market
The second commandment that disciplined traders know is that everything can happen in the market. For example, an asset that is rising can quickly decline sharply.
Similarly, the unimaginable can happen. A good example of this is what happened during the 2010 flash crash. At the time, the major indices in the US like the Dow Jones and Nasdaq 100 declined by more than 10% in a single session.
Therefore, you should protect your trades by implementing a stop-loss for all your trades. Analysts believe that a trailing stop-loss is much better because it moves with the asset.
Plan your day and week well
Planning is an important concept that most disciplined traders use. These traders usually have a systematic approach for analyzing the market.
They also have a good trading plan for their days. For example, most of them start their sessions by looking at the happenings in the Asian and European market. They then look at the news, watchlist, and pre-market movers. They then do analysis and execute their trades well.
However, while having a good plan is a good thing, you should avoid being too rigid about it. This means that you should always take advantage of new market conditions change. For example, you can always execute a new trade even when it is not in line with your plan.
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Know your strategy
The other commandment of day trading is about your strategy. Ideally, you should always have a good trading strategy that is tested well. Fortunately, there are many strategies that you can use.
Some of the most popular trading strategies in the market are scalping, trend-following, reversals, and arbitrage among others.
Successful traders take time to come up with their strategies. They develop these strategies and test them in a demo account before they apply them in a live account. And they never stop optimizing it.
Therefore, before you risk real funds, we recommend that you should always know more about your strategy.
No one has a 100% success rate
Another trading commandment you need to know is that no one has a 100% success rate. Therefore, even when you become a successful trader, not all your trades will be profitable. Indeed, we have seen this situation with the best traders and investors.
For example, Warren Buffett is one of the best investors in the world. Yet, he has lost billions of dollars betting on companies like Kraft and IBM. Similarly, Bill Ackman lost millions of dollars when he invested in Netflix in 2022. In the past, we have seen many others successful traders lose money in the market.
Related » The Top Habits of Highly Successful Day Traders
You must manage your losses
As mentioned above, there is no perfect trader or investor. Also, you will always lose money in the market. Therefore, as a trader, you should always know how to manage your losses well.
Some of the top approaches to managing your losses well are through using a trailing stop-loss and by using the arbitrage strategy.
Related » How to Start Trading Again After a Big Loss
Another way to manage losses is to cut them early when you suspect that you made a mistake.
Protect your account
In line with the previous point, you should always ensure that you protect your account well. There are several approaches that will help you achieve this:
- Trade sizes – Ideally, a large trade size will give you more profits when things are going well. However, they will also expose you to bigger losses if things go south. Therefore, always position your trades wisely.
- Stop-loss and take-profit – Always have a stop-loss and a take-profit for all trades that you execute.
- Leverage – A bigger leverage will always lead to higher profits but it will always expose you to bigger losses if things don’t work. Therefore, always manage your leverage well.
- Overnight trades – As a day trader, it is unwise to leave your trades open in the overnight session because of the significant risks that happen.
Size your position well
As mentioned above, the size of your trade is very important. The more money you risk, the more you expose yourself to risk.
For example, assume that you have a $100,000 account. You then conduct an analysis and find that a stock trading at $10 is a good buy. In this case, you can use your $100k to buy the stock. You can also decide to use $40,000 to buy the shares.
If you are accurate, your first trade will make you more money. On the other hand, if you are wrong, the loss will be much bigger than the latter trade. Therefore, always ensure that your trade is not significantly big or significantly small.
Related » The 2% Rule
Never forget analysis
Further, you should never forget analysis when trading. There are several types of analysis that you should always do in the market. The most useful analysis strategies are fundamental, technical, and price action.
In fundamental analysis, you look at the prevailing news and economic data. On the other hand, on technical analysis, you should look at indicators like moving averages and the Relative Strength Index. Price action analysis refers to the process of looking at charts like triangles and head and shoulders.
Keep track on everything
Finally, always keep track on every trade – noting the reasons why you entered the trade and why you exited, such as any news – that you make in a trading journal. The benefit of having a trading journal is to ensure that you can replicate past successes and avoid future losses.
Remember: success must be replicable (and not the result of luck), while losses must teach us something.
Summary
In this article, we have looked at some of the most useful trading commandments that you should know as a novice trader. Others that are worth mentioning (these are a step above) are about having realistic expectations, checking for volume and volatility, and to always continue the learning journey.
