How to build Share Market Trading Discipline

The legendary trader, Jesse Livermore used to always say in share market tips, that the day the trader stops being disciplined that is the day he stops being a trader. Discipline, in many ways, is a way of life. It is not just about rules and regulations but it is more about a way of life. If you think that you can be a trader without discipline, then perish that thought. Whether you are a short term trader or a long term investor, discipline forms the cornerstone of your trading and investment strategy.

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Discipline is the ability to stick to a set of rules and a broad trading plan, irrespective of the circumstances. That is not to say that you must not be flexible. You must! The point is that unless trading and investing is not process driven it is going to be hard to sustain. How to build share market trading discipline?

1.   It all begins with a trading plan and please adhere to it

What is meant by a trading plan? Firstly, it is not a static document but a dynamic rule book that evolves over a period of time. It documents what will be your return expectations, how you will approach the market at different levels of valuations, maximum amount you will risk per trade, the maximum loss of capital you will endure etc. At any point of time, if your actions are in conflict with the trading book then the trading book must prevail.

2.  More you sweat in peace, the less you bleed in war

This discipline applies to both trading and to investing. Not only in investment but you must do adequate homework in trading too. You must study the news flows, you need to study the technical charts, and you need to understand supports and resistances and you need to figure out if it is a weak or strong market. Above all, it must be part of your core discipline that you never take any trade in the market without thorough homework. That is not a choice, it is a discipline.

3.  There is an important discipline called, “Doing Nothing”

You may wonder, what is the big discipline in doing nothing? Actually, it is very hard to implement. Any action in the market has to be backed by conviction. Anything done mindlessly will only result in losses. At times markets may be too volatile or too confusing. Instead of trying to fish in troubled waters, have the discipline to sit out and wait for the right opportunities.

4.  Nothing beats the discipline of detailing

When you are a trader or investor, keep your mind and ears open. Nothing is too small to be dismissed. The small details matter a lot in trading and investing. Trading costs may appear to be mundane, but if you take care of the micro issues it can make a huge difference to your ultimate returns. It is these small things that require discipline. Take care of these small items and the bigger issues take care of themselves.

5.  For a trader, there is nothing as sacred as the stop loss

This is more applicable to a trader but investors also need to keep this in mind. The idea of a stop loss is that it represents a point where you decide to close out your trade and take a fresh view later. Remember, trading is a lot more about managing your losses and protecting your capital than about chasing returns. If you can protect your capital and adhere to a disciplined approach then trading returns will follow automatically.

6.  When you profit targets are reached, don’t get greedy

Equally important, like your stop loss discipline, is to honour your profit targets. Profit is what you book; all else is book profits. This discipline can be slightly different in case of an investor. You have the luxury of hedging your long positions with derivatives or even convert stop losses into rolling stop losses. As a trader, the profit booking discipline is a lot more important. The best of traders operate with finite capital. That means capital has to be managed. Only if you keep booking profits can you churn your capital. Otherwise, you don’t get fuel for risk and your positions are stuck for too long.

7.  Risk management discipline means don’t spread yourself too thin

This is one of the fundamental disciplines called prudence. When you take a trade, ask yourself if you can afford that risk. The risk you take must be proportionate to the loss you are willing to bear or the loss that you can afford to bear. It is absolute lack of discipline to wipe out 50% of your capital in one trade. Always cut your coat according to your cloth. Don’t take losses that can cripple you permanently.

8.  Spend a lot of time reading and searching for new ideas

Good traders and investors are boring guys. They spent hours poring over balance sheets, cash flow statements, MDAs, price charts, news flows, trading patterns etc. Spend your time looking for new ideas. That is an important discipline you need to instil because for a trade there is nothing as important as continuous and constant learning. Avoid spending too much time on chat forums. That typically shows lack of focus. Don’t waste time watching television or listening to market opinion expressed on TV. The best ideas are never available free of cost on TV. Somebody out there is just feathering his tail. Try to spend a lot of time crystallizing your trading ideas and reviewing the pros and cons of your performance. That is the best way to instil mental discipline. And this mental discipline matters a lot!