Trading can be a lot of fun and profitable, or a nightmare and very costly. It really just comes down to understanding the key areas, which will make or break your trading.
I have received a few e-mails asking me to explain more about how I stay disciplined, making sure my emotions don’t get the better of me. Some questions asked are:
- How do I pick a trading strategy that will work for me?
- What are some of my experiences?
- What reading material and habits do I recommend for keeping focused?
- How do I stay disciplined and keep emotions from taking over?
I will cover all this for you below, because trading discipline and managing emotions are by far the most important and difficult aspects of trading.
How Do I Pick a Trading Strategy That Will Work for Me?
Your strategy should be in line with your abilities to read the market, and also focused on a time frame that suits the time you have available to trade each day, week, or month. In other words, you should not be trading ETF options if you cannot profit from trading ETFs without leverage. Also, if you don’t understand how options work in depth, then you need to spend some time learning about this type of trading vehicle before you ever place a trade using options. Simply put, if you don’t understand everything about what you are trading, then you will eventually give all your money to the market, leaving you with an empty account, decreased trading confidence, and maximizing frustration.
The point I am trying to make here is that you should focus on trading the types of vehicles where you understand the daily price action, how to trade that investment, what makes it move, is there leverage, and what time frame you should focus on, so that it works with your schedule. If you can only look at the charts at night after the markets close, then you should not be focusing on daytrading. So pick something you like, understand, and want to trade, and then learn everything about it. Then find a trading system, or create one yourself, which is profitable using the time frame and risk tolerance that fit your personality.
Over the years, my trading strategy changed, as will yours. The more time you spend trading, the better you will become, and the more you will find yourself trading more of one type of investment that consistently makes you money. When I started trading back in the late 90’s, I focused on stocks, but as time went on, my strategy evolved, and now, my main focus is on trading indexes and gold with a hybrid intraday and swing trading strategy that I created. My focus is on ETFs because you can select different levels of risk/reward with the 1x, 2x, or 3x leveraged funds. While ETFs are fantastic to trade, they do have some limitations. Because the indexes and gold trade 24/7, you are limited to only regular market hours, 9:30 am – 4 pm ET. That leads me to the topic of futures and CFD trading.
Depending on the type of trade and time of day a setup occurs, I will jump from ETFs to futures or CFD’s. Let me explain. If there is a setup early in the morning before the regular market opens, or after the close late in the evening, then I trade futures or CFDs because it allows me to trade 24/7, catching moves which would not even be seen by most North American traders. There are not a lot of these trades per year, but enough to make it worth trading.
NEXT: More Important Questions (and Answers)
|pagebreak|What Are Some of My Experiences?
In short, virtually every trader will eventually reach the tipping point. What I mean here is you will either lose enough money and/or become so frustrated that you will debate whether or not you should continue trading.
I reached this level many years ago and I still remember it crystal clear. I lost most of the money in my account, almost every trade was going against me, and I had never been so frustrated and upset in my life. I’m sure many of you know what I am talking about. Unfortunately, trading does break a lot of people down, financially and emotionally, causing them to give up. But others reach this point and realize that if they can be wrong all the time, then someone who knows what they are doing should be making good money and that they just need to learn what they are doing.
This is the point at which you decide whether to give up a lifelong dream of trading full time to go back to your day job, or you step back to re-evaluate your situation and seek professional help. All successful traders have (or had) a mentor at one point in their life, and it does not matter which career you are in, learning from someone who knows how to do what you want is the fastest and most effective way to learn.
Those who decide to continue and take things serious shift their mindset from trying to trade to learning to trade. It is at this point when trading becomes fun and profitable again. My point here is that trading is not something you can learn quickly on your own. You should get help from someone who is successfully doing exactly what you want to be doing, then shadow their every move and seek mentoring from them. This usually costs more than just buying a book or mini e-course. There is no comparison between what you get out of those and obtaining practical experience.
What Reading and Habits Do I Recommend for Staying Disciplined?
There is no easy answer, as everyone absorbs information differently. Some prefer reading and studying charts, listening to audio, watching videos, and some prefer or need live mentoring and real-time examples
I learned charting from the well-known analyst John Murphy through his book Technical Analysis of the Financial Markets. This is a massive book with over 500 pages explaining technical analysis. This book is a lot to digest, but there is a lot of great free information online, which will allow you to read about the basics of trading, including chart patterns, volume, candlesticks, support and resistance levels, and trend lines. Once you understand these key concepts and are able to read the charts, then you are literally ready to start paper trading and applying or creating a trading strategy, which manages entry, exits, scale out prices, and manages your money.
As most of you know, I am a very patient trader when waiting for risk setups in the investments that I understand best and have consistently traded for many years. Because of my strict trading setups and rules that I have set for myself, it does cut down on the amount of trades the market provides. My focus is on low risk, high-probability setups, which I completely understand, and that’s all I trade. This trading strategy works on any time frame, allowing me to use it for daytrading and swing trading.
The Question Everyone Wants to Know: How Do I Stay Disciplined and Keep Emotions from Taking Over?
This takes me back to the tipping point mentioned earlier. I always ask myself if the trade meets my setup criterion, which is a simple yes-or-no answer because my setup criteria is clear in my head. Either it has the characteristics I am looking for or it doesn’t. Sometimes the setups are very close, and I will admit it is very tempting to take the trade, but I always step back (walk away from the computer) to clear the emotions flying around in my head and ask myself, do I want to break a rule, which almost broke me financially and emotionally once before? The answer is always no. So I pass on the trade and wait for another one to unfold.
When I was first learning to daytrade, I quickly learned that I did not have to take every setup that looked like it had potential. I realized that no matter what condition the market was in, there would always be another trade just around the corner, so it’s not a big deal. I admit, I hate to see an investment make a large move without me— like this seven-day rally in gold happening right now—because my setup criteria was not met. But I know there will be many more trades through the year in gold and other investments that will provide me with great returns. People who think they need and must catch every big move in the market in order to make big money on yearly basis are looking at things completely backwards. It only takes five to ten good trades per year to outperform the market, so I don’t understand people when they panic about every zig and zag the market makes.
Ok, lets take a look at the gold chart, which I have overlaid with two cycles thay I use to help time gold.
|pagebreak|Nine-Day Gold Cycle
The daily chart of gold below has my nine-day cycle overlaid. You can see how this cycle relates to the price movements of gold. After the recent low cycle, we saw gold continue to move higher, and this is because the trend of gold turned up in March, while the long-term cycle is also moving up at the same time. These two bullish forces can overpower the short-term, nine-day cycle at times.
That being said, the nine-day cycle will be topping in two days (Tuesday), and that should put some selling pressure on gold. I expect to see a pullback or consolidation (sideways movement) in the coming week.
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29-Day Gold Cycle
This cycle allows us to see the big picture and underlying trend for gold. This larger, more powerful cycle of gold will top in one day (Monday), and that should put a damper on this rally. You can see how I think gold will play out from the lines on the chart.
Click to Enlarge
Combined Cycles on Gold
This chart clearly shows how both cycles will top this week, which should put some selling pressure on gold and silver, which is one of the reasons I have not chased the price of gold higher while buying in a panic.
Click to Enlarge
Conclusion: Gold Trading Discipline
In short, trading discipline is something you can become educated about from books, but the only way to actually take control of your trading is to be honest with yourself. Think of it this way: Every time you break a trading rule, you are setting yourself up for failure. Do you really want to sabotage the most important person in your life, which you will have to live with every day (i.e. you)? If you cannot trust yourself from sabotaging and lying to yourself, what type of person would you be? Do you want to lose money by taking positions that are proven not to work and cost you money in the long run? Of course you don’t!
So the next time you see a trade that is close to your setup, but not exactly what you are looking for, just walk away and wait for the next one.
And as for the current price of gold, I think we are about to see lower prices, or at least a pause, which will last for five to 15 days.
By Chris Vermeulen of TheGoldAndOilGuy.com
