Mastering Discipline: Overcoming Emotional Challenges In Trading

Key Points

• Traders should identify their triggers and proactively manage them in order to avoid poor decision-making and emotional trading.
• Implementing a preflight checklist and setting a shot clock for trades promotes discipline and optimal decision-making.
• Taking breaks, having a trading accountability buddy, and adhering to risk management strategies, such as hard stops, contribute to maintaining a clear focus and controlling emotions in trading.

Key Points

• Traders should identify their triggers and proactively manage them in order to avoid poor decision-making and emotional trading.
• Implementing a preflight checklist and setting a shot clock for trades promotes discipline and optimal decision-making.
• Taking breaks, having a trading accountability buddy, and adhering to risk management strategies, such as hard stops, contribute to maintaining a clear focus and controlling emotions in trading.

When it comes to trading, be it intraday or swing to medium term, there are several forces that a trader cannot control. However, what traders can control are their emotions and discipline. Without discipline, a trader is as good as a ship without a rudder, at the mercy of unpredictable winds and currents.

A trader who disregards discipline and allows emotions to cloud their judgment and decision-making is often called trading on "tilt." When not addressed, trading on tilt can cut a trader's career short before it begins.

Below are several ways to overcome this challenge, turn weaknesses into strengths, and become a more disciplined, mentally sound trader.

Identify Your Triggers

A trader should have an honest conversation with themselves to identify the causes of poor trading decisions. For example, not getting enough sleep, eating poorly, or even arguing with a partner are all possible reasons for poor decision-making or tilt trading. By identifying all of the potential triggers, a trader, in real-time, can be proactive and avoid allowing the emotions and reactions to spiral.

Preflight Checklist

One of my favorite additions to my process has been the preflight checklist. This is a personalized checklist that fits within each person's routine. The goal of the checklist is to identify whether or not a trader is in an optimal state to capitalize on the day's opportunities. For example, a trader's morning checklist might comprise sleep quality, morning exercise, pre-market preparation, zero distractions, identifying niche opportunities, and potential A+ setups. 

Have A Shot Clock

Understand the strategy that is deployed and implement a shot clock. It might be beneficial for a trader to set a time stop and a regular stop loss, whereby depending on the strategy, a trader gives the trade a specified time to follow through.

For example, a shot clock would be almost instantaneous for a momentum scalp trade, as a momentum scalp should work almost immediately. For an intraday swing trade, 1 – 3 hours, and if the stock fails to continue its trend during that period, then cut it and move on. Implementing a shot clock is an excellent way to remain disciplined and reactive to how a stock is trading.

Take Small Breaks Throughout The Day

Often, if a trader sits behind the screen all day reading the tape and staring at charts, their vision and decision-making can become blurred and suboptimal. An excellent addition to a trader's routine could be setting reminders or alarms on your phone, or even sticky notes, to get up and stretch the legs every thirty minutes or hour.

By giving your eyes and mind a rest, you can break up the day into segments and reassess the action and opportunities with a clear focus. Upon returning, zoom out, identify the bigger picture and critical levels, and get in sync with the market. 

Having a Trading Accountability Buddy

Of course, trading can be isolating, especially if you do not surround yourself and connect with other like-minded individuals who are trading similarly. By connecting with fellow trader(s) and sharing each other's goals and challenges, traders can hold each other accountable and consistently partake in review sessions to establish a baseline and work towards continuous improvement.

3 Strikes And You're Out

One of the worst habits a trader can build is overtrading, specifically revenge trading a particular stock. The three strikes and you out rule will protect a trader from revenge trading if they can employ discipline and adhere to the rule. This rule means that a trader can only take three shots at executing a specific idea or trade while risking a predefined amount before taking the loss and moving on.

If a trader gets three strikes, they must move on from the stock, losing a predefined and planned amount, and not trade that symbol again on the day.

Do You Know What Your Edge Is?

One of the easiest ways to go on tilt is trading without a plan, confidence, hesitation, and, ultimately, edge. By edge, and precisely without it, I mean trading a setup or strategy that lacks positive expectancy. A trader can gain an edge by back-testing specific strategies, setups, and nuances.

After that, time should be spent analyzing the results and doubling down on the research for setups and strategies showing promise and profitability.

If a trader is deploying capital into setups that have not been tested, they enter the unknown with the odds stacked against them. Allowing emotions to take control is far too easy in such a case. To avoid making emotional decisions, lean on statistics and research, allowing you to make informed trading decisions.

Set Hard Stops

Understanding where you are wrong and identifying whether the risk or reward makes sense before placing a trade is vital. After that, a trader must set a hard stop to avoid a skewed risk: reward and potential for an excessive loss. By placing a hard stop, a trader eliminates the uncertainty of loss amount and employs essential risk management.

As a trade works, a trader can also trail the stop loss using VWAP, previous higher lows or lower highs, or the ATR of the stock, for example. By effectively managing risk, a trader will be in more control of the trade management, decreasing the risk of emotions gaining control.

Plan The Trade, Trade The Plan

Every trade placed should first be the subject of a clear-cut plan that possesses an edge and a degree of positive expectancy. The trade is entered once the plan is set and the opportunity materializes. Whether or not the trade works is out of a trader's control. However, if a trader can employ the above, trading should become less about being right or wrong and more about controlling what can be controlled and possessing positive expectancy.

Whether success is achieved in the markets or not comes down to the individual trader and their ability to manage themselves as an elite trader would. That is where the battle is either won or lost.