25

RULES TO BECOMING A
DISCIPLINED TRADER
How is it that some traders only last a few months while
others carve out a career in currency markets over a
lifetime?

One word… Discipline.

Discipline keeps us alive when a series of bad trades

threatens to extinguish our account.

Discipline lets us change with the market.

Discipline helps us fight our worst enemy — emotions.

While each trader forges their own path, successful

currency traders share common elements.

We believe these are the top 25 most essential rules

necessary to become a disciplined trader.
PREPARATION
“Give me six hours to chop down a tree and I will spend
the first four sharpening the axe.” ― Abraham Lincoln
Your Title Here

1 | Journal your trades

A journal is the single most valuable tool for any trader. Yet, most of us let
it lapse or commit to one half-heartedly.

Journals provide an unbiased view of your trades, cutting through emotions

and noise to show you exactly what happened. Used correctly, a trading
journal helps currency traders identify risks and opportunities.

While there are thousands of templates out there, the best ones incorporate
the following elements for each transaction:

• Entry time and price • Target price or indicator

• Exit time and price • Stop price or indicator
• Position size
2 | Develop a Trading Plan
A well-crafted trading plan is a roadmap to success. Like any
business plan, it defines key elements such as:

• Trading style • Performance review milestones

• Risk management • Markets you wish to trade
• Setups for your strategy • Trading schedule

In this whitepaper, we discuss many of these in more detail.

All of them need to align with your goals and expectations.

Otherwise, your strategy could deliver too much volatility or
employ too little leverage.
3 | Create an economic
data release schedule
Economic data can and often do move currency markets as well as
equities. Every currency trader should know when these are
scheduled and plan for them.

These points inject increased volatility, creating both opportunities

and risks. Swing traders can use them as catalysts, while high-
frequency traders may be better off avoiding them altogether.

4 | Pick a trading style

that works with your
lifestyle
Imagine trying to day trade while holding down a full-time job.
Other than checking your phone during meetings, chances are you
won't be successful in the long run. Your trading style needs to
match your lifestyle. Take an honest assessment of how much time
you can dedicate to trading daily, weekly, and monthly. Then
develop a trading plan and strategy that matches.
PERFORMANCE
“Practice the philosophy of continuous improvement.
Get a little better every day.” ― Author Unknown
5 | Schedule a regular
performance review
Collecting data is all fine and good. But it's only useful when studied.
Regular reviews serve several purposes:

• It keeps a trader focused on their trading plan

• Compare emotions and perceptions to reality
• Identify potential problems and opportunities

Performance reviews should be as structured as possible. These ensure

each session provides optimal value and covers all the necessary
elements.

6 | Use an accountability
partner to maintain
objectivity
We all get tunnel vision from time to time. Keeping a friend or trading
partner on the side can help you maintain objectivity. If you don't know
anyone that trades currencies, consider joining an online community or
group of like-minded traders.

Another great way to keep yourself balanced is with a trading mentor.

Mentors provide invaluable insights based on experience. They can help
you avoid pitfalls that plagued them early on.

7 | Try and study ideas in

a simulated account first
Never implement a new idea in your real money account without first
testing it in a paper (demo) version. In fact, you shouldn't begin trading a
new idea until you've completed one of your scheduled reviews and then
rewritten your trading plan. It's easy to get caught up in a new idea and
miss something small and important that could wreck your account.
Think of an algo trader who fat fingers a decimal point and ends up with
a position size 100x larger than they intended. Wouldn't you rather find
out about that without risking real money?
8 | Avoid analysis paralysis
Traders can often overthink situations or trades, leading to analysis
paralysis. Indecision is especially prevalent when emotions are
high, or a trade is failing. If you start to second guess yourself in
the middle of the action, do the following:

• Read your current trading plan and strategy.

• Commit to finishing this trade exactly as prescribed.
• Write down any ideas or questions you have and leave them for
your scheduled review.

Later on, when you review your trading journal looking for patterns
and opportunities, remember that nothing will ever be perfect or
full proof. At some point, you will need to decide whether to put an
idea into action.

It's ok to trade a strategy you aren't 100% comfortable with as long

as you have and trust a review process.
9 | Simplify indicator usage
How many times have you seen a trader's chart with so many indicators you
can't see the candlesticks beneath it?

Indicators come in two flavors: reactive and proactive. Reactive indicators

look at past price action to tell you what has happened. These include moving
averages, Bollinger Bands, and the like. Proactive indicators attempt to
identify turning points before and as they occur. These include oscillators,
divergences, stochastics, and the like. Some traders will break these down
further into volatility and support and resistance indicators.

Whether you use two or four groups, if you use multiple indicators from one
group, ask yourself whether they individually provide value or need to be
used together for a strategy to work. Quite often, traders find they have
overlapping indicators that function similarly. Excess indicators not only clog
up your screen, but they can also slow down a platform's performance and
gunk up your analysis. Look for them during your scheduled reviews and
consider removing ones you find unnecessary.
10 | Make friends with
expected value
Expected value is the amount you forecast to make on average over many
trades. You only need three pieces of information to calculate this metric: win
rate, potential profit, and potential loss. All of this can be derived from your
trading journal, substituting average for potential profit and loss.

The calculation is as follows:

Expected value = (% chance of winning x potential profit) -

(% chance of losing x potential loss)
Note: Your percent chance of losing is 100% minus your percent chance of
winning. An expected value greater than one means you should turn a profit
over time. Less than zero indicates you would lose money. And zero, you
would break even.

Here's an easy example.

Say I give you $1 every time you flip heads on a coin, and you lose $1 every
time you flip tails.

Your expected value is $0 since you have a 50/50 shot of either occurrence
and your risk and reward are equal.

Now assume that I pay you $1.25 for every time you flip heads, but you lose
$1.10 for every loss.

Your expected value is as follows:

EV = (50% x 1.25) - (50% x 1.10) = $0.075

Trading works the same way. Say your win rate is 65%. Your trading journal
says you average $150 profit for your winners and $200 for your losers.

Your expected value calculates as follows:

EV = (65% x $150) - (35% x $200) = $97.50 - $70 = $27.50.

So, on average, you should make $27.50 per trade.
 MANAGING
EMOTIONS
“No work is stressful. It is your inability to manage your
body, mind and emotions that makes it stressful.”
― Jaggi Uasudeu
11 | Be OK with losing
No matter how good you are, trade long enough, and you will lose.
It could be one loss. It could be a string of losses.

That's part of trading. Every trader needs to understand and plan

for this.

Losing is only a problem when it happens more often than you'd

expect over many trades, or you take losses that are much larger
than expected.

When you accept losing as part of the game, it becomes easier to

take those small losses rather than holding on and hoping for more.
 Here are some signs you need to
take a break from trading:
• You find yourself overtrading, taking
marginal and sometimes sloppy
setups
• You've taken a handful of really large
losses lately
• When you're not trading, you're going
over trades, particularly losing ones,
in your mind
• You become more irritable or have
started to lose sleep.

12 | Take breaks from

the markets
Trading is work as much as it's fun. It's stressful and rewarding.
Like any good business, we sometimes need a vacation. It's easy to get
caught up in the markets. That's why every trader needs to take regularly
scheduled breaks where they unplug.

We're not talking about going home at the end of the day but stepping away
from the screens. Breaks help us recenter and reset ourselves, especially
when bad behavior creeps in.
13 | Take an emotional
inventory regularly
We noted that journals are the single most valuable tool for currency traders.
Why? Because emotions are the biggest obstacles they face.

Emotions cause currency traders to ignore their plans, over trade, take excess
risk, or unproven strategies, ultimately leading to disastrous results. We can't
get rid of our emotions. But we can diminish their influence. That starts with
an emotional inventory.

While you ideally want to do it before every trade, you should at least identify
your emotional state before every session. Ask yourself questions such as the
following:

• How do you feel?

• What are your current worries and hopes?
• Have any significant events occurred that could destabilize your work?

If you think that emotions could impact your trading, take a step back. You
don't need to trade every day. There's always another opportunity around the
corner. Instead, work on the causes of your emotional distress. If you cannot
solve them, develop a plan that regularly checks your emotions throughout
the day, before each trade, or limits as much in-the-moment decision-making
as possible.
14 | Reset your
account from
time to time
Many traders have mental blocks against
certain dollar amounts.

Maybe you struggle to break $50,000 or

$100,000.

Other times they start taking larger or too

many losses when the account grows
beyond a certain point.

When this happens, consider resetting

your account.

Find a set amount you're comfortable

trading with and limit how much you will
let that account grow.

Then, simply take profits out and reset the

account
 TRADE
MANAGEMENT
“In trading, it’s not about how much you make, but
rather how much you don’t lose.” ― Bernard Baruch
15 | Start Small
With few exceptions, there is no successful strategy that works on a
$500,000 account that can't work on a $5,000 one. Newer traders are
especially prone to blowing up. It's almost a rite of passage.

That's why you want to start small. Don't focus on total profits. Instead,
look at percentage changes. Building consistency will build your
confidence.

16 | Trade often
George Soros famously made $1 billion betting against the British Pound
in the early '90s. One shot wealth is more the exception than the rule.

Few traders earn their living off only a handful of profitable trades,.
Instead, they make money through hundreds if not thousands of small
trades.

Trading often allows the law of averages to work in your favor.

It ensures that no one trade or string of them will obliterate your
account.

17 | Focus on decisions,
not outcomes
Traders could learn a thing or two from The Field of Dreams. If you make
good decisions, profits will follow. Humans are hardwired for recursive
learning, using feedback to adjust.

Trading is a lot like poker. Even with the best hand, you can lose. The
best poker players and traders don't worry about whether they win or
lose on any given day or hand.

Instead, they make sure they make the best decisions possible, knowing
that the outcomes will turn in their favor over time. Keep in mind, even
proven strategies can and do break down over time.

Focusing on making the right decisions helps us separate luck from

strategy.
18 | Every trade should
have an entry, target,
stop, and size before it
starts
This is one of the hardest concepts for newer traders to grasp.
Knowing your entry, target, stop, and position size is essential to
risk management.

Without knowing these ahead of time, you open yourself up to

potentially devastating losses. What many people don't realize is
these don't have to be exact numbers.

Actually, traders often use zones, targets, candle closes, and the
like to structure their trades. Even if a trader uses the time of day
to exit a trade, they still keep fail-safe risk parameters in place just
in case.

19 | Don't touch your stops

It's far too easy and all too common for traders to move their stops.
Once you've clicked your mouse, you've sealed your fate. With rare
exception, adjusting your stops during a trade is a recipe for
disaster. We set stops to keep our losses in check. Once we start
fiddling with them, we've removed a critical constraint and opened
ourselves up to the potentially devastating consequences.
20 | Understand market
correlations
This is for our Forex traders, especially. When investors want safety,
which currencies do they typically pick? The Japanese Yen or the U.S.
Dollar.

What about more risk? Try the Turkish Lira if you can stomach it.

While each Forex market is unique, many correlate to one another.

Correlation is a measure between -1 and +1 of how two markets relate:

• +1 means the two markets move exactly in the same direction.

• -1 means the two markets move in exactly opposite directions.
• 0 means the two markets move entirely independently of one another.

Forex traders need to keep this in mind when they take positions across
multiple currencies. Otherwise, they may find themselves with
concentrated risk in like Forex markets.
 RISK
MANAGEMENT
“All of life is the management of risk, not its
elimination.” ― Walter Wriston
21 | Manage your position
and portfolio size
Never take an arbitrary position size. Every trade that you take should be
measured. You should be able to determine how each position would
impact your portfolio before executing a trade.

22 | Set daily and weekly

loss limits
Everyone hits a rough patch in their trading lives. Sometimes it's us.
Sometimes it's the markets. The key is not to let any string of losses ruin
you or your account. Daily and weekly loss limits prevent any streak from
ending a trading career, whether driven by the market, a broken strategy,
or our emotions.

23 | Never leave trades

unattended
This might sound obvious, and no, we're not talking about using the
restroom. Our world is full of distractions. It's easy to take a phone call
and lose focus on what's going on. Heck, some traders completely forget
to close out trades before leaving the office. Don't let that be you. If you
don't plan to exit a trade manually, always have a stop loss and target
order in place just in case.

24 | Your first loss is your

best loss
This adage has been used by countless traders and never loses its value.
In layman's terms — take small losses before they become big ones.
Traders stay in positions for two reasons: they don't want to be wrong, or
they don't want to lose money. Once your trade has gone outside the
parameters of your strategy, you've turned it into a gamble.
25 | Don't
trade what you
can't afford to
lose
We’ve saved the most important for last…

We all want to make money trading. That's

why we start. But the last thing you want
to do is trade money that you can't afford
to lose. What does that mean?

Here are three simple rules:

• Don't borrow money to trade that puts

you in debt (this is different from
leverage).
• Don't take money you've set aside for
another savings purpose.
• Don't trade money that you need to pay
your bills.
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