The Disciplined Trader – How to Become a Successful

Trader
medium.com/@jan_5421/the-disciplined-trader-how-to-become-a-successful-trader-bb5be4ba8685

Book summary

Jay

Focus on using your trading as an exercise to identify what you need to learn. Don’t focus
on the end result (making money) – making money will be a by-product of what you know
and how well you can act on it.

Prioritise mastering the seven steps to become a disciplined and successful trader over
anything else.

Seven Steps

1. Staying focussed on what you need to learn

2. Dealing with losses
3. Becoming an expert at just one market behavior
4. Learning how to execute an edge flawlessly
5. Learning to think in probabilities
6. Learning to be objective
7. Learning to monitor yourself

Step One: Staying Focused on What You Need to Learn

Ask yourself: What do I need to learn or how will I have to adapt myself to interact more
successfully?

Each moment is a perfect reflection of your level of development.

Set aside a certain amount of trading capital as tuition for your education. Setting
aside money that you will trade with as an exercise to learn some needed skill is a very
powerful symbol of your commitment to learning that skill.

Build a corollary framework to place all of your trading experiences. This framework
needs to be defined in such a way that all experiences are valid and have meaning, and,
as such, mistakes don’t exist – they just point the way.

Change your definition of a missed opportunity. Nothing’s worse than missing a

“perfect” opportunity. However, if you could have, you would have; it’s that simple. The
sooner you accept this, the sooner you will be able to take advantage of these missed
opportunities instead of beating yourself up over them.

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 As long as the price keeps changing, there will always be another opportunity.

Step Two: Dealing with Losses

Trading Rule #1
Predefine what a loss is in every potential trade . By “predefine,” I mean determine what
the market has to look like or do, to tell you that the trade no longer represents an
opportunity, at least not an opportunity in the time frame in which you trade.

Confront the possibility of being wrong and consequently not avoid the inevitability of
taking a loss . So confronting and accepting the inevitability of a loss is a learnable trading
skill.

Trading Rule #2
Execute your losing trades immediately upon perception that they exist . When losses are
predefined and executed without hesitation, there is nothing to consider, weigh, or judge
and consequently nothing to tempt yourself with.

If you find yourself considering, weighing, or judging, then you are either not predefining
what a loss is or you are not executing them immediately upon perception, in which case,
if you don’t and it turns out to be profitable, you are reinforcing an inappropriate behavior
that will inevitably lead to disaster. Or if you don’t and the loss worsens, you will create a
negative cycle of pain, that once started will be difficult to stop.

The next error after letting a loss get out of hand is usually not taking the next opportunity,
which invariably is always a winning trade.

Step Three: Becoming an Expert at Just One Market Behavior

The beginning trader will need to limit his awareness of the market information to which
he allows himself to be exposed. More is not better; it just creates confusion and overload
that will ultimately lead to losses.

Start as small as possible and then gradually allow yourself to grow into greater
and greater amounts of market information.

Become an expert at just one particular type of behavior pattern that repeats itself with
some degree of frequency .

Understand completely every aspect of the system – all the relationships between the
components – and its potential to produce profitable trades . In the meantime, it is
important to avoid all other possibilities and information.

You will be letting all the other opportunities go by. This is a real exercise in discipline.

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If the idea of letting go of opportunities that don’t fit into your framework is troubling to
you, then ask yourself, what is the rush? If you are confident in your ability to transform
yourself into a successful trader, what difference could it make that you let go of some
opportunities now for educational purposes?

Until you are the trader you want to be, your objective is to do the least amount of
damage to yourself, both financially and psychologically.

There are many traders who end up becoming expert market analysts but can’t
make a dime as traders because of all the damage they did to themselves in the
early part of their trading careers.

Perception and execution are separate skills. They can and do work in tandem, if there
are no mental components blocking execution. Otherwise, the “intent” to take advantage
of what you perceive as an opportunity may not have any inner support or the kind of
inner support that is necessary to execute your intent properly. If there are mental
obstacles preventing the proper execution of a trade, then learning how to perceive
better opportunities is not going to solve the problem.

Step Four: Learning How to Execute a Trading System Flawlessly

To be able to execute your trading systems properly, you will need to incorporate two
concepts into your mental framework – thinking in terms of probabilities and correlating
the numbers or the mechanics of your system to the behavior.

The only way you can really learn these things is actually to experience them by
executing your system.

Exercise
Take some of the trading capital that you set aside for your education to buy and trade a
simple trading system with well-defined entry and exit points. Make a commitment to
trade this system exactly according to the rules.

The object of this exercise is to work through any resistance you may have to following
your rules.

Find a system that suits your unique tolerance for taking a loss. The amount of money
you risk per trade should be an amount that you are completely comfortable with.

When you are feeling pain, instead of being focused on what the market is teaching
you about itself and yourself, you will be focused on information that will ease your
pain.

Your objectives are to:

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➢ learn the skill of flawless execution by learning that you can foll ow the rules you set
forth for yourself (I am defining “flawless execution” as executing a trade immediately
upon perception of an opportunity; inclusive within opportunity is the opportunity to exit a
losing trade)

➢ to incorporate a belief into your mental system about the nature of probable outcomes
so that you believe that you can make money in the long run with your trading system, if,
of course, you can execute it properly.

Understand that this exercise (at least for most people) is not going to be easy, so be
easy on yourself. If your child were learning how to ride a bike, I’m sure you wouldn’t
scold him for falling off and tell him not to try again.

You have to act on all the signals of your system in spite of your resistance, and you have
to do it long enough for the system to become a part of your mental framework. When
that happens, you will have the force of habit working for you, and the struggle will cease.

What you are doing is more of an exercise in learning trading discipline and the skill
of flawless execution, which in the long run is far more important than your
immediate desire to make money.

Step Five: Learning To Think In Probabilities

We may never know what traders will in fact do. But we can determine what they will
likely do if certain things happen first.

Ask yourself these questions to learn staying with the flow of the market:

What is the market telling me at this moment?

Who is paying up to get in or get out?
How much strength is there?
Is momentum building?
Can it be measured relative to something?
What would show that? If the market has displayed a fairly symmetrical type of
pattern and that pattern has been disturbed, then it is a good indication the balance
of forces has shifted.
Are there any places where one side will definitely gain dominance over the other?
If that point is reached, it still may take some time for the other side to be convinced
they are losers. How long are you willing to give them to stampede out of their
positions?
If they don’t stampede out of their positions, what will that tell you?
What did traders have to believe to form the current pattern relative to the past?
Remember that people’s beliefs don’t change easily unless they are extremely
disappointed. People are disappointed when their expectations aren’t fulfilled.
What will disappoint the predominate force?

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 What is the likelihood of that happening?
What is the risk of finding out in a trade?
Is there enough potential for movement to make the trade worth the risk?

Ask yourself this question: For this trade to be valid or continue to be valid, the market
shouldn’t trade to what price point? If it trades within that point, then the trade still has
potential for working. Beyond that point, it is no longer valid in the direction that I started.

Identify your significant reference price points and place your orders on either side of the
point; then wait for the market to do whatever it is going to do. Try putting your orders in
the market in advance of whatever you perceive as having a high probability of occurring
based on the existing market conditions.

Observe the market as if you were not in a position.

Your inability to execute or the degree to which you hesitate after you perceive an
opportunity to get in or out of a trade or reverse your position will be an excellent gauge
as to how locked in you are mentally.

Take notes of occurrences of hesitation or immobility . It gives you an indication of the

exact state of your mental resources to execute.

When you are about to enter into a position, ask yourself by imagining, what the next five
minutes or tomorrow (depending on your time-frame) would have to look like to validate
your trade , to confirm that the trend is still intact. What would the next five minutes or
tomorrow have to look like to indicate the opposite.

Keep reminding you that anything can happen , and you will be preparing yourself in
advance for those possibilities.

Stay detached and understand that price movement is a function of traders acting
individually and collectively as a force expressing their beliefs in future value. The
greatest number with the strongest belief will always be right.

Step Six: Learning to be objective

To achieve a state of objectivity you need to operate out of beliefs that allow for anything
to happen.

If you operate out of a belief that anything can happen, then whatever does happen won’t
be threatening to you in any way, thereby causing you to avoid or distort certain
categories of market information.

Have no commitment to any particular outcome. Just observe what is happening in each
moment as an indication of what will probably happen next.

Here is what objectivity feels like, so that you can recognize when you have achieved it:

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 You feel no pressure to do anything
You have no feeling of fear
You feel no sense of rejection
There is no right or wrong
You recognize that this is what the market is telling me, this is what I do
You can observe the market from the perspective as if you were not in a position,
even when you are
You are not focused on money but on the structure of the market

Step Seven: Learning to Monitor Yourself

Start paying attention to what you are thinking about and what market information you
are focused on .

Trading Rules
When you are in a trade constantly ask yourself if anything “has to happen.” Monitor how
you feel, your level of commitment to what has to happen.

There is a big difference in perspective between “what is happening” and something that
“has to happen.”

If you find that your commitment levels are rising, .

Ask yourself what can’t happen? What can’t the market do? When you find yourself
rationalizing the market’s behavior to support your position, you are operating in the realm
of illusion and setting yourself up for a painful forced awareness.

The market can do anything, even take your profits away if you allow it.

Always take something out of the markets when you find yourself in a winning trade.

Ask yourself: are you prepared to give yourself money today?

If the answer doesn’t come back a resounding yes, then find out why before you trade.

When you find yourself focused on the monetary value of a trade instead of the structure
of the market (i.e., what the trade is worth to you in dollar terms, dreams, goals, and so
forth instead of what the market is telling you about its potential to move in any given
direction) then assume you are distorting or avoiding certain information and either don’t
put the trade on or take what you have off until you become more objective.

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