Five steps to trading discipline (and why you should care)

You have to be a disciplined trader. This is one of the nuggets of trading wisdom we hear constantly, and for good reason–it’s true. Without discipline, we will make many mistakes in the highly competitive market environment. But it’s not as simple as saying to yourself “be disciplined” and watching all your trading problems melt away. Discipline, for many traders, is a battle to be fought over many years and a goal that is not achieved with some maturity as a trader. Here are five things you can start doing, today and right now, that will move you a little further along the path to being a disciplined market participant.

bricklayer1. Understand, intellectually, the reasons why discipline is important. Many of the battles you will fight with discipline are emotional and behavioral, so you cannot simply reason them away, but you are unlikely to be successful unless you understand why it matters so much. I’ve written about this at great length elsewhere, but the simplest way to say it is that the market is very random so that rewards (positive outcomes) result just about as often from bad decisions as from good decisions. Random reinforcement is a powerful tool for shaping behavior, and the market often acts like a capricious teacher that yells and rants at good students while giving the very bad students candy! Consider that all of this happens in a highly emotionally charged environment, and you start to see why trading can be so challenging, and why the tools that serve you well in nearly every other aspect of your life are likely to let you down in the market. This is why discipline is important–without discipline, you aren’t likely to survive and thrive in the market.

2. Have a plan. This is another perennial nugget of trading wisdom that holds great truth (and I’ve covered how and why to build a trading plan in great depth in this free course.) When I was mentoring and teaching many traders, the critical question I always asked was “did you follow your plan?” If you do not have a clear plan, then this question is meaningless. We need to leave room for many different styles of trading here. Perhaps you buy stocks because you see companies make products you like. Personally, I don’t think that’s a great investment plan, but you could probably do that provided you include some other pieces of information such as: where are you getting out if you’re wrong? How do you know you’re wrong? How much do you buy when you buy? How do you take profits? You need to have answers to all of these types of questions before you do anything in the market–that’s a trading plan. Discipline, then, is “simply” following that plan. Without the plan, it’s pretty hard to evaluate discipline.

3. Evaluate your performance regularly. In this context, I don’t mean whether you made money or not; I mean one simple thing: did you follow your plan? That’s the only question that matters. (Yes, there’s a time to reevaluate and change the plan, but that’s a significantly different aspect of your job as a trader/investor.) If you aren’t disciplined every moment in the market, you aren’t disciplined. Every second, every day, every tick, every trade, every exit, every interaction with the market–you must be disciplined. If you aren’t a disciplined trader all the time, then don’t say you are a disciplined trader. Evaluate your ability to stick the plan regularly, and be aware of the times you’ve fallen short. (Hint: keep a journal. Write this stuff down!)

4. Become aware of your “tells” and behavioral triggers. We all have things that set us off. Maybe it happens when someone cuts us off at an exit driving. Maybe it’s the way someone looks at us or uses a certain tone of voice, or a passive aggressive tone in email–for traders, there are certain things in the market that can cause our discipline to waver. What are those things, for you? It’s different for everyone, so you have to understand yourself and what makes you tick. Are there things outside of the market that are likely to make you more vulnerable to having a break of discipline? Even more important, how can you tell when you’re about to have a lapse? Learn to see yourself as an outsider, perhaps to take the role of a manager, therapist, doctor, or friend to the “you” that is the trader, and learn to tell that person when he is danger.

5. Learn to break the cycle. We often do the same stupid things in response to the same behavioral cues–this is, in some ways, the very definition of self-destructive behavior. You don’t have to be at the mercy of your emotions and reactions; you can take control. There are many tools and techniques you can use to protect yourself. (And they aren’t complicated; they can be as simple as: go for a walk. Get away from the market, etc.) You can’t, however, use them if you don’t know you need to, which is why step #4 is so important. If you don’t know yourself, it’s very hard to manage yourself.

Nothing here is a quick fix, but these are ideas and tools that have served me well in the market. Look at your own trading and investing; work through these steps and think about what you could do better and how you can work toward the goal of being a perfectly disciplined trader.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 9 Comments

  1. A_Joe

    Superb Post … The Random Reinforcement from Markets along with illusion of control with Trader is a real thing .. The power of habit by Charles duhigg can be a good read If a Trader can relate to it…. Thank You !

    1. Adam Grimes

      Thank you, and yes that book is an excellent read!

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