Discipline or Trading Strategy – What is More Important?


Often, traders will expend huge amounts of time honing and calibrating their trading strategy, and this is, of course, a good thing to do. However, it’s rarely strategy that lets a trader down. In fact, the vast majority of established trading strategies can work very well – if you use them correctly.

Trading Strategies that DO Work

sellhighFor example, let’s look at the daddy of all trading strategies – that of buying high and selling low. This tends to work very well when the instrument you are trading is following a swinging or ranging pattern. You can make good profits by entering the market at support and resistance levels that have not been broken in weeks, months, or years. This strategy can also work quite well across shorter time frames, but this does increase the risk of false breakouts, which can cause stop loss levels to be hit before the trade has a chance to become profitable. With this type of strategy, setting the risk/reward strategy appropriately is key, so that you can afford to set your stop loss levels at a point where you get wiped out less frequently. A ratio of 1:2 or 1:3 should be sufficient for this type of strategy.

Breakout trading and trend following are also techniques that, if used correctly, can be very profitable indeed. All you need to do is wait until a currency pair breaks out of daily or weekly ranges and starts moving quickly in a trending pattern. From there, you just need to follow the trend, placing a trade during the support/resistance breakouts or the pullbacks, and moving your stops when the price enters a different range.

So Why Are You Still Making a Loss?

Any of these strategies could easily make you a hundred pips a week or more, so why is it that so many forex traders end up running at a loss? The answer lies not in the strategy – which, as we’ve established, isn’t that hard to get right. The reason so many traders fail is that they get carried away and fail to stick to the strategies they have worked so hard to develop. The key to trading success is discipline, which is a lot harder to cultivate than a winning strategy. Take a look at this list – are you guilty of any of the following? (be honest!)

  • Not bothering to move stops closer to entries
  • Failing to close trades when the market turns against you
  • Staying online and trading when the market is going crazy
  • Lacking a disciplined approach to money management

Dealing With Failure

failureOne of the biggest obstacles for any trader is being able to deal with their first big failure. Often, traders will develop or adopt a strategy that seems, at first, to be a winner. Then, market conditions will change, and the strategy stops working. For example, a trend following strategy will only work when a trend is in progress. However, if you’ve been making good profits with it, your positivity about it could blind you to the fact that the trend is over. You could end up making quite a lot of losing trades before you notice this, by which time you could well be running at a loss.

When this occurs, the best way to deal with it is to take a break for a couple of days to calm down, analyse what went wrong, and either wait for market conditions to be suited to your strategy once again. This would be the level-headed thing to do, but trading tends to be an activity that incites high emotions. When you’re in profit, it can make you overconfident. When you’re in the red, it can make you angry and upset. Both states are conducive to making poor investment decisions, but what can you do to combat your natural urges?

The Plan

First of all, you need to develop a money management plan, and stick to it rigidly. By using risk management techniques, you can ensure that you never risk more than an appropriate amount of your capital on any one trade, so even if you have a string of losses, you can recover from them without having to dip further into your savings. Secondly, you need to avoid the tendency to over-trade. This means developing a system that allows enough time to research each trade that you make. Many professional day traders employ a similar strategy, where they might have a self-imposed limit of one or two trades per day, and spend the rest of their time doing research and backtesting their strategies. Thirdly, you need to learn about trading psychology, and the emotional pressures that may be influencing your trading without you realizing it.

Ultimately, no strategy is perfect, and all of them will make you losses from time to time. The currency markets are erratic and unpredictable at the best of times, with spikes and irrational movements caused by factors such as economic news, manipulation, and central bank interventions. This is why it’s important to use stop losses, and have a trading plan in place that you can stick to. No strategy will be successful without discipline, and in many ways, it’s more important to have the discipline to stick to a strategy than it is to have the best strategy. After all, lots of strategies can be profitable in the long term, but not many undisciplined traders are. It’s all about surviving to trade another day, and in order to do that, you need to keep your emotions in check.