Trading Discipline

I am involved in futures trading since 4-years. I am working as a broker. The topic I would like to discuss is a very old one: "Discipline"!

I made a lot of trades in very different markets. My trading philosophy is basically 100% technical. I'm a very big fan of technical analysis and technical trading systems. My very special trading vehicle is candlesticks combined with stochastics or sometimes a different oscillator, but I don't concentrate on the oscillators because they are more or less the same. I really concentrate on candles.

I am also using Swing Catcher because I think it is a really excellent program, but I use it in connection with additional systems. Swing Catcher was the first software I used and I want to explain my experience and show some big mistakes that I made.

I received the software and installed it immediately. I had it run very quickly. The only problem I had concerned the data feed from CSI (Commodity Systems, Inc.), not due to CSI, but due to my modem. At this point, I want to thank Dave because he really supported me in an excellent way!

I had a view at the performance of the last month and I was really surprised. I decided to trade the German Deutsche Mark and Swiss Franc futures (in low risk trading mode) because they showed a wonderful profit (the first nonsense, because these markets are highly correlated as I knew, but I was blind already seeing the profit on my account).

The first order was placed to buy DM. The dollar was around 1.49 and from the fundamental point of view, the buck was a buy but I decided to follow the system (that was ok).

The U.S. dollar came down to $1.46 and my DM position was perfect. One day after the long-DM, the system came up with a buy signal for SF and I decided to go long.

I have to mention that it was ok because I strictly followed the system concerning entering the market and concerning the stops.

Both positions were winners, but on the same day the German Bundesbank crossed my trading plans. Buba was intervening heavily by selling Deutsche Mark. I was stopped out on both positions with an absolute crazy fill on the Swiss Franc.

The DM locked in a profit due to an adjusted stop, but the loss in the SF was bigger and I suffered a net loss of about $1500. I was shocked. My account then showed a balance of $400 credit.

Now I recognize my second stupid mistake: I simply overtraded my account. Two positions in highly related currency futures in a $1900 account doesn't make sense!

I stopped trading due to lack of money. As a poor student I could not afford to loose additional money. I watched the system and a friend traded some signals for his account.

He made two loosing trades and then told me that the system is no good. After thinking about the whole problem, I came to the conclusion that he was absolutely wrong. He and I already made our third big mistake. You have to follow a system strictly for a longer time and not stop trading after two loosing trades. These trades are simply not significant.

Then we watched the following signals, which were excellent and resulted in big profits, but we had no positions.

My friend revised his opinion concerning the system very quickly and became a big fan. That was the fourth mistake, because these few winning trades were also not significant.

He started to trade the signals again and although he would have made profit on the next trades, he actually did not because he did not follow the recommended stops!!! That was the fifth mistake. He generally is no friend of stops, which is of course reflected in his account balance.

After trading two years without using the system from the beginning of the before mentioned trade, he lost about $75,000. Of course, the system was called no good again after doing the before mentioned last trade using the system but NOT using the recommend stop.

That was the next big mistake. He always shifted his inability to make profit. Although it was obvious that he made a wrong decision by not using the recommended stop, he said that the system is good for nothing.

He then traded using his "feeling" and lost a lot of money. But of course, it was not his mistake. "The market reacted the wrong way," he told me, "they are playing against you with the target to get your hard earned money."

I told him that this was by far the biggest nonsense I ever heard in my life and asked him why he does not stop trading if he knows this fact. He was not able to give an intelligent and satisfying answer. He is still trading and of course still loosing money.

I won't continue, but believe me I could tell you a lot of stories which would make your hair stand.

I really believe that a successful trader needs three things:
1. Important - A trading system to find buy & sell signals that fits to the trader, which he is comfortable with. (It need not necessarily mean a computerized system.)

2. More Important - Money management techniques. That means you have to define your risk before entering a position and then place the stop and do not change it once the market is trading near the stop level. If you get stopped out, wait for the next signal to step in again, but do not alter the stop 20 times. It does not make sense. Don't trade to big numbers in relation to the size of your account.

3. Most Important - Discipline, discipline and discipline! Trade the signals as they occur. Use the stops under consideration of the risk you are willing to take and do nothing else! This "nothing else" is maybe the most complicated matter overall.

The most successful traders are those who comply 100% to the system they are trading. If the system does not show the results you are looking for, choose or develop a different system with a new approach. Don't make the mistake of having a system and not complying with signals! If you can manage your mental environment to follow these three points, you can bet on your trading success.