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Discipline

The information on this page is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

Discipline in trading is paramount. All good traders have good discipline.

Have you ever had a large loss which you wish you had managed better? As a follow-on to “Trailing stops / Running profits not losses”, Discipline is another key element to trading. Without it, one’s trading lifetime can be cut short prematurely. Closing loss-making positions early keeps capital intact and leaves one the opportunity to trade something with a better risk/reward, or retry the same trade again at a better entry point. At Accendo Markets you are not buying shares. You are trading CFDs, allowing you to change tack quickly. If a position goes wrong, you can close it and move on. This can mean the difference between big losses and decent profits. As we have said before, many decent profits versus a few small losses makes a profitable CFD trader.

The following 3 points are from Chapter 3 of “Trader Vic – Methods of a Wall Street Master” by Victor Sperandeo. Here he focuses on capital preservation, consistent profitability and pursuit of superior returns. Most lose money by risking too much per trade. Instead of focusing on big winners, he says, 1) protect capital, 2) work towards consistent returns and, 3) use part of profits to increase future risk. Trading is a long game. Big wins will come, but when they do you need to be able to trade to profit from them. After all, you only get one chance to lose everything.

Capital Protection

The author’s first question when taking a position is “what potential loss can I take on this trade”. The second is “what profit can I make”. A risk/reward ratio greater than 1:3 is considered good. Calling every trade correctly is highly unlikely. When a trade comes good, the reward should go some way to helping make up for the inevitable losses incurred elsewhere along the way. The trade should also be let run as far as it can, potentially using a trailing stop to lock in gains along the way.

Consistent Profitability

To gain capital you need to be consistently profitable. To be consistently profitable you have to preserve gains and minimise losses. The risk/reward balance needs to be continually assessed. Exposing oneself to the full value of one’s account on the first trade would be extreme. Putting all one’s eggs in one basket is paramount to gambling, which is not what CFDs are designed for. The aim is to find the best trading opportunity and use CFD leverage to magnify the returns. If a loss is taken, it should be as small as possible, leaving maximum capital for future trading.

Capital Use

One way to protect a £50K account, and prolong trading, could be to limit one’s expose to 20%/£10K per trade. Stops could then be used to limit trade risk to no more than 5%/£500 per trade. This would equate to risking just 1% of total capital per trade. If the trade went awry, and the stop loss triggered, 99% of the account value would remain available for future trading. Each time a trade is won or lost, the calculation would need to be redone based on the remaining capital in order to avoid taking more risk to make up for the loss. If a profit is made, half could then be banked and half used to increase risk on the next position, while using a stop loss would mean only risking a portion of profits while protection all capital and half of prior profits.

Summary

Discipline is tough, especially with trading being so individual and solitary. Pride can thus take over (refusal to admit to a bad trading decision). Nipping it in the bud means being able to continue trading. Sitting on losing positions can result in not being able to do anything about it.

Run the profits not the losses. If you are disciplined with your trading, your capital should last much longer.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.