Tips for Maintaining Self-Discipline When Trading

There are dozens of books, videos, and online tutorials about how to trade profitably. Most are well-intentioned and cover topics like when to buy at the right time, how to know when to sell, and how to identify winners. That’s good advice, but it won’t get you off square one unless you first learn to remove the emotional factor from your decisions. Unfortunately, too many people use the gut instead of their head when choosing what to buy, how long to hold it, and when to dive back into the market and start the whole cycle over again. Emotion is the enemy of smart investing. The good news is that you can create a rules-based system and avoid all the pitfalls that come with emotion-based buying and selling. Here’s a strategy for using your head instead of your heart.

Write Your Rules

Intelligent profit-making is about rules, both making them and sticking to them. Write up a set of simple criteria for entry and exit. Include how you’ll decide where to set stops, how large each position should be, and how to spot portfolio candidates. An example of a basic written set of rules might be that once you’ve decided to buy something, don’t spend more than five percent of the available account balance on the position. Only buy in an up-trending market when the 50-day moving average is above the 200-day average. Sell after taking a 10 percent profit or when the 50-day/200-day lines reverse. Set stop losses two percent behind the entry point. Of course, that’s just a generic example.

Study Regularly

It’s important to avoid the ego-driven attitude of being an expert now, and don’t need to learn anything else. It’s a poison thought. To dispel it, look at yourself as a lifelong student of the trade, always willing to take in new ideas. The easiest way to practice that healthy attitude is to utilize learning resources from your broker, like knowledge bases, simulators, and investment libraries.

Practice on a Simulator

Most platforms have trading simulators. These clever little devices (they’re actually sophisticated apps) can teach you how to place orders and maneuver with the ups and downs of daily price action. Additionally, they’re excellent ways for people of all experience levels to keep their emotions in check and update their techniques. Consider spending a couple hours on the simulator every month. Never assume that you’ve graduated or become too smart to practice on the sim.

Avoid Sideways Markets

Some people love to be involved in the daily action of the securities markets. It’s exciting, interesting, fun, potentially profitable, and keeps the mind feeling fresh and sharp. The problem arises when you can’t stop, or when you don’t know when to get out. It’s important to cultivate the ability to know when the markets are going sideways. Non-trending charts are a common occurrence in all types of securities. When your research tells you that prices are stuck in neutral for a while, don’t be afraid to put your capital into cash and sit out the doldrums.

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