Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Become a Disciplined, Confident Trader
06/03/2011 11:27 am EST
Traders who deviate from their plan often sustain losses and lose confidence, but Toni Hansen discusses how to cultivate the discipline that is needed to stay on track and succeed.
I’m talking with Toni Hansen about the role of discipline in trading. Hi Toni….How important is it to have discipline in any type of trading strategy?
Well it’s the most important thing that you can have in trading, particularly because there’s so much emotion involved. A lot of people just really overlook that fact. They know a strategy or a set-up really well, but they go and try to implement that strategy, and maybe they don’t know it as well as they should have.
Emotions start to take over and they go off the track; they don’t stick to what their plan is.
A lot of people just don’t have that capacity from the start to be able to be disciplined, so understanding how to develop that discipline is key. It’s the difference between success and failure.
How does the trader work on that to develop the discipline to stick to it?
It’s a lot about building confidence. Even though you have a system, you might not necessarily have the confidence in that system.
In fact, from the start, your chances of having the confidence in the system are really slim, so it’s seeing—not only seeing that confirmation over and over again—but seeing the little nuances of how a strategy can vary over time in different market circumstances, and knowing how to approach those differences.
So knowing how they can affect your target level, stop level, everything like that; there’s a lot that goes into it. The more you see, the better you’re going to be able to believe in it and stick to the rules that you already had in the first place.
NEXT: A Simple Step for Learning and Developing Confidence|pagebreak|
One of the problems though in creating and trying to get to the disciplined level is that you may be right, but your timing is off. And the next time the set-up comes in, as you said, you’re lacking that confidence to jump in. What do you do then?
A big part of developing your discipline is going to be having a trading journal. There’s so many ways that you can have a trading journal, but what I prefer…you can start with something really straightforward, straight and simple, just take your charts from the trade that you have and print them out.
Print them out on a couple different time frames because that’s going to help with your timing, too. So if you’re trading on a daily time frame, don’t just print out the daily chart, print out a 15-minute and even a five- or even a two-minute, based upon where you actually got in and out of your position.
This can all just be on one sheet, print that out, and it’s going to help you see where you should have gotten in technically compared to where you did.
This goes back to the more you see it, the more confidence you’re going to have in it to jump on that trigger.
You’ll see the little differences that can give you a clue, “Well, this is where you need to get in.” The more you review it, the more confident you’ll become in it.
How do you come up with your action plan?
Well, I’ve been doing this for 15 years, so it was a long process.
To start with, I really didn’t have a great plan of action. I started very simply. I was just looking at pullbacks in an uptrend as buy strategies.
By printing them out and just kind of guessing every day where I thought it was going to go the next day, I started to see those differences. See the things that were giving the confirmation versus ones that wouldn’t, and it didn’t really work as well.
That developed into something I was able to put down. Once you put something into words, it’s easier than just saying it out loud. Even if I wasn’t sure on something, I would take a guess. (But) I wouldn’t just guess and leave it in my head. I would write it down, and then I would look to see if that guess—if my intuition (was) confirmed over time—and you begin to weed things out. That makes you go a lot more quickly in the right direction.
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