Trading is often romanticized as a quick pathway to financial freedom, yet the reality is far more sobering. Everyone ends up paying a tuition to the market, but not everyone learns the lessons being taught.
The key here is that trading successfully isn't a sprint. Instead it's a marathon requiring a disciplined and systematic approach paired with sound risk management.
This article aims to educate traders, particularly beginners, on the paramount importance of discipline, systematic approaches, and the role of physical and mental health in trading success.
Discipline and Systematics in Trading
Trading without a disciplined approach is akin to navigating a storm without a compass. A disciplined trader adheres to a well-thought-out trading plan, avoiding impulsive decisions driven by emotions like fear and greed.
Moreover, a systematic approach ensures that traders follow a consistent methodology, making their performance more predictable and manageable over time.
Risk Management
A core aspect of disciplined trading is robust risk management, which primarily aims to prevent substantial losses that can derail a trader's account and, over time, mental health. Risk management involves setting stop losses, managing leverage, and only engaging in trades with favorable risk-reward ratios. Taking trades for the sake of trading isn't trading at all. It's gambling. Discipline is key.
A favorable risk-reward ratio ensures that potential profits justify the risks taken. For instance, a risk-reward ratio of 1:4 implies risking a dollar to make four. Lower odds than that are not favorable unless one enjoys gambling.
Stop Losses and Bracket Orders
Employing stop losses is a crucial risk management tactic to cap potential losses. Similarly, bracket orders are advanced order types combining an entry order with pre-set stop-loss and take-profit levels, ensuring that trades are executed within predefined risk parameters​.
These tools automate parts of the trading process, fostering a systematic approach and aiding in avoiding emotionally driven decisions when managing losses. A time when emotions often run very high, and logic doesn't tend to prevail.
Getting rid of losing trades quickly is just as important as riding winners as long as they keep working. Many traders are doing the opposite: holding losers and exiting winners prematurely.
Trading on momentum is one strategy that can help to improve one's probabilities of successfully managing trades.
Momentum Strategies
Momentum strategies capitalize on market volatility by taking positions in assets showing strong upward or downward trends. Such strategies often involve identifying entry and exit signals based on prevailing market conditions, aligning with the systematic approach of letting the trading strategy make your decisions. Taking emotion out of the equation for execution.
Below I'll discuss three popular momentum strategies, in a summary format so that you can better understand how they may be useful for your trading.
Remember that there is no one size fits all trading style. We must adapt to what works best for our personality type, risk tolerance, preferred time frame, and goals.
Relative Strength Index (RSI)
Theory: The RSI strategy employs a momentum oscillator to measure the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. It aims to identify the general trend, overbought and oversold conditions, buy and sell signals, and to provide bullish and bearish divergences. A key being that oversold in a downtrend and overbought in an uptrend are less meaningful indicators.
Usage Summary: By utilizing RSI, traders can gauge market momentum and identify conditions that are potentially overbought or oversold. This can help in determining entry and exit points, thus keeping traders disciplined rather than reacting impulsively to market fluctuations​.
Moving Average Convergence Divergence (MACD)
Theory: MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price - the MACD line and the signal line. Traders look for signal line crossovers, centerline crossovers, and divergences to generate trade signals. Moreover, MACD histograms, which are derived from the difference between the MACD line and the signal line, are used to gauge the strength of the trend.
Usage Summary: MACD assists traders in identifying trend direction, momentum, and the strength of the trend. It aids in recognizing potential buy and sell signals, thereby promoting systematic trading rather than impulsive decisions.
Average Directional Index (ADX)
Theory: The ADX is a momentum indicator that measures the strength of a prevailing trend over a specified amount of periods. It comprises three lines: the ADX line that gauges trend strength, and two DMI lines that indicate trend direction. When the ADX line is above 25, it suggests a strong trend, while readings below 20 indicate a weak trend. ADX does not provide information about the trend direction, but rather the strength of the trend, whether upward or downward.
Usage Summary: ADX is instrumental in determining the strength of a trend, which can aid traders in deciding whether to enter or exit a position. It also helps in filtering out price fluctuations (noise) and provides a clearer picture of the market's momentum, which in turn, promotes disciplined trading as opposed to emotional trading
There are many other momentum-driven trading strategies to consider. These are among the more popular, but that doesn't necessarily mean they are the best fit for what you're trading. Take time to study any new indicators you plan to add to your charts, and wherever possible consider backtesting how you identify exits and entries.
The Long-Term Perspective: Trading is a Marathon
Trading success isn’t about being right on every trade; it’s about consistency and profitability over time. No trader is always right. Anyone who claims as much is lying, plain and simple.
Mental and Physical Well-Being
A long-term perspective requires a sound mindset, accepting losses as part of the journey and allowing winning trades to run while cutting losers early.
If emotion clouds our judgment, we will reduce our odds of succeeding as a trader, and increase the chances of burning ourselves out as well as losing capital.
That's why taking care of ourselves matters a lot more than we may realize when it comes to trading successfully.
Sleep, Nutrition, and Exercise
Adequate sleep, balanced nutrition, and regular exercise are fundamental for maintaining both physical and mental health.
Exercise, for instance, not only enhances physical health but also improves blood flow to the brain, supporting better decision-making and stress management.
A balanced diet is crucial as it fuels the body and brain, impacting a trader's ability to focus and make informed decisions. Neglecting these aspects can lead to increased stress, fatigue, and impaired judgement, which are detrimental in the trading arena​.
Regular Breaks
Taking regular breaks can help mitigate the effects of prolonged stress and prevent burnout. Breaks can provide an opportunity to clear the mind, reduce tension, and return to trading with a refreshed perspective​.
Continuous Learning and Adaptation
The trading environment is dynamic and requires traders to continually learn and adapt. Engaging in ongoing education and learning from both successes and failures can foster a growth mindset, which is beneficial for mental health and trading success.
Social Support
Having a strong support network of family, friends, and peers can provide emotional support, which is crucial for managing the psychological ups and downs of trading. This is one reason why we encourage anyone who may be actively trading to join our Discord. We have an inclusive community for traders of all skill levels and backgrounds that provides an invaluable support framework for many.
Closing Thoughts
Trading successfully over the long-term demands a disciplined and systematic approach, grounded in solid risk management practices. Improving your trading habits, execution, risk management and consistency is just as important as ensuring you are in good mental and physical shape to take on the trading day.
These two areas of focus are inextricably bound together and one's success relies on mastering them both.