The golden rule of trading, you may be surprised to hear, has nothing to do with technicals or fundamentals, profit strategies, platforms, or indicators. The key to becoming a successful investor lies rather in a quality: discipline. Lack of discipline is the number one reason for trader failure, but exercising your discipline will help you fill the bank, not break the bank. Trading discipline consists in mastering two separate components: emotions and logic.
The world of trading is an exciting place, and as such it can very easily arouse the emotions. While there is nothing wrong with enjoying the thrill offered by the trade, you should never allow your emotions, whether positive or negative, to take over or overwhelm you at any time while trading. Seeing the little light on your screen flashing red as a trade turns against you can be quite alarming, and it may even urge the undisciplined trader to rash decisions, such as placing more immediate trades to counteract the effects of the first trade, which may result in far greater losses than the trader’s account can sustain. Conversely, watching the light flash green, indicating that you are in the money, will certainly boost your confidence, but riding your “lucky streak” to the end will most certainly put you deep in the red before you’ve had any time to enjoy even a penny of your profits. Setting predetermined limits for yourself, however, on the amount of money you are willing to invest in each trading session, regardless of the final outcome of the trade, will help you effectively manage the inflow and outflow of your account. The successful trader knows how to control his emotions, and although he feels both the thrill of a win and the ache of a loss, he refrains from impulsive, emotional reactions to the market.
But emotional discipline alone cannot save your trade. If your investment plan consists of random guesses and hunches about the market, then you will have no checks and balances to apply to your vacillating emotions. Only a pre-established trading plan deeply rooted in knowledge of the market can control your emotions with its logic. For smart investments, you must educate yourself in the area of your trade, be it currencies, commodities, stocks, or indices. Knowing how to analyse the factors and events that affect the trading of an asset will help you make educated forecasts regarding the direction of the market based on facts and figures. Approaching the market, armed with knowledge, will prevent you from second-guessing yourself on account of the opinion of the crowd. Trusting your own analysis of events will not only boost your confidence as a trader, it will also prevent you from experiencing devastating regrets on account of not following your own advice.
Remember that trading in more like a marathon, rather than a sprint: you need to pace yourself by setting limits, accept some losses along the way without losing control, and trust that your knowledge and training will get you to the finish line a winner in the long term.