Discipline: “Habit of Obedience”
Have a trading plan or system is essential to the exercise of good discipline, as it normally imposes certain parameters and sets out certain criteria which dictate how trading decisions should me made and what needs to be done in certain situations. Habitually following your plan is what is meant by the exercise of good trading discipline, which, in turn, will help you realize the best expected results possible from your plan. If you find that your trading plan or system is not meeting your expectations, despite habitually following it for a reasonable period of time, good discipline requires that you be prepared to review it and make any adjustments or fine tuning necessary for future use.
Lack of Discipline
Day traders who suffer from lack of discipline often allow their emotions to rule their trading decisions, which often leads to bad decisions and unacceptable trading losses. Never allow your emotions to rule your trading. In order to trade successfully, you must develop a trading plan.
Many inexperienced traders demonstrate lack of discipline by being afraid or reluctant to take losses and to get out of a stock when it goes down, in the often vain hope that the share price will rise again. Often, however, the share price tumbles even lower, and the trader’s initial small loss in the trade becomes a large one. Likewise, some day traders often get greedy if the share price rises and are reluctant to take profits off the table when their trading plan or system suggests they should. They think the share price will rise even more, and they can make even more profits. However, the share price may subsequently drop, causing their gains to dwindle or become losses. Fear or greed are two emotions that should play no role in the life of a disciplined day trader.
What It All Means
In short, discipline requires that you: Trade on the basis of trading plan or system and not on the basis of your hunches or emotions. Take a profit when you’re supposed to in accordance with your pre-determined plan. Take a loss when you’re supposed to in accordance with your pre-determined plan. Don’t trade when there’s no need to.