Improve Your Trading? Time to Go Mental

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If you’re looking to improve your trading, there is one area–above all–that you’ll need to address; it’s the mental game. If you’ve said to yourself, “I’m not going to each pizza for a whole month,” or “I’m going to work out three times a week at the gym,” and then couldn’t follow through, your mental game needs work. Discipline is required, whether trading, sticking to a diet, or getting to the gym. Discipline is a crucial factor in developing a solid mental game. Luckily, working on your mental game can be combined with finding or creating a trading plan that suits your personality, is easy to implement, and ultimately produces a profit. Here is how to develop discipline and your mental game while creating a plan for your trading.

Look Inside, Not Outside

The world is full of strategies and ways to trade, yet the average trader continues to be frustrated despite this plethora of information. You choose to be average, or you can separate yourself by utilizing discipline. To develop discipline, we first need to admit to ourselves we have some flaws. We must stop blaming the outside world and take full accountability for our trading success. The markets owe us nothing; therefore, we must take the time to develop ourselves and our tactics to win. If you were to go into battle, do you expect your enemy to lie down and let you take their resources? No, you must hone your skills and execute a plan flawlessly to take the field. Anyone can read a book on strategy; it is the person who works diligently to implement it, does the work the strategy requires, and gets the glory. Don’t blame the market, surprise news, volatility, a book, or your broker for your losses or frustrations. Admit to yourself that you have the power to change the circumstance you’re in by changing how you operate in regard to your trading. This can be done by learning or creating a new strategy, switching brokers, getting out of losses sooner, establishing a more consistent exit technique, or other actions which put control back in your own hands.

Create a Plan

Once we start to take accountability for actions, a game-plan is needed. To be disciplined, we need a specific set of rules that must be followed. Writing down a plan outlining exactly how you’ll trade takes time, and it takes discipline. It is not glamorous, and it can be tedious, so most traders who fail never bothered to do it.
Your trading plan should include three major sections:

  • Entries
  • Exits
  • Money Management.

The Entries section covers how you will enter trades and for what reasons. The Exits section covers how you will cut losses or take profits. This section might include the use of trailing stops, stop losses, or exiting an option contract early, depending on which market you trade. Money Management covers how much of your account you can risk a single trade — a rule of thumb is never to lose more than 1% of your trading account balance on a single trade. Most traders risk much more than that, and results usually aren’t favorable. Your position size will also need to be covered in this section.

– Entries
– Exits
– Money Management
-What markets you’ll trade.
-Time frame you’ll trade.
-How you’ll get in.
-Why?
-The exact entry signal.
-How you’ll exit with a profit.
-How you’ll exit with a loss.
-Will you use trailing stops?
-Where are stop-loss orders placed?
-Will you use profit targets?
-Maximum risk per trade.
-Maximum and minimum position size.
-Do different strategies have different risk or position size requirements?
-Can you simultaneously trade highly correlated markets (increasing risk)?

This simple three-section plan must cover exactly how you enter, exit, and manage your positions. No trade is made unless the signal for it is written down in your plan under Entries. And you don’t exit the trade until one of the rules in your plan tells you to do so. Your position and risk are managed exactly as the plan outlines. Completing a thorough trading plan can take a day, weeks, or even months as you trial and error your entries and exits and fine-tune your risk management skills. During this process, it is recommended you use a demo account and not a live trading account. Simply going through this process will create discipline and prepare you to make trades and stick to your plan in real-time.

Don’t Rationalize

Your plan is written down, and you’re ready to start making trades. Initially, things may go well—you’re sticking to the plan. Then one day, maybe because you’re bored, you take a trade for which you don’t have a strategy. You rationalize it by saying, “I should have a plan for this trade, so I will take the trade now and include the rule in my plan later.” Or, “I will just do this (gamble!) once to make a bit of money, then I won’t do it again.” The wrong approach; if something should be in the plan, include it first, then take the trade. And if you are capable of “cheating” on your plan once, you will do it again. Just don’t do it, ever. By making such rationalizations, failure is almost inevitable over the long term. This is because you choose to make decisions based on random emotional impulses instead of a structured and well-thought-out trading plan. Acting on impulse decreases your odds of winning dramatically in a game in which the odds may, at best, only slightly be in your favor.

Commit To Perfection

None of us are perfect, but we can get close to perfection in certain endeavors under our control. You can’t win every trade because that is out of your control. But what you can do is attempt to be perfect in executing your plan. Every day before you start trading, commit to follow your plan—win or lose. If you open a trade, you weren’t supposed to in a moment of weakness, close it immediately regardless of the cost, loss, or commissions. Don’t waver, ever, from your plan. If your plan needs revision (adding to it or deleting something), revise first, research your changes, do your due diligence, then make your trades. Choose to be perfect in this area of your life. It doesn’t mean you will win all the time; it simply means you follow your plan–to the letter–all the time.

Final Word

Discipline isn’t something you can practice outside of being disciplined. To practice discipline, you must be disciplined, and it doesn’t get easier, unfortunately. There are always temptations that will attempt to get you to deviate from your plan. Therefore, commit right now to devise a strategy and plan for yourself. Then stick to it. No trader wins all the time, so don’t strive to make a perfect plan; instead, strive to execute your plan flawlessly.

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