Improving Your Stock Trading Discipline

Implementation Intention

Stock Trading is full of temptations and that can make it hard to stick to your trading plan. There are times where you see a stock running and you get in, not wanting to miss the action, only to see it top out and retrace, forcing you to get out for a loss. Sometimes you take a loss and quickly get back into a trade because you want to make your money back, which leads to an even bigger loss. Even the most elite traders make these mistakes and you can't rely on sheer willpower to make you disciplined. This is where Implementation Intention comes in.

Implemetation Intention is the act of simply writing a detailed plan which projects your mental plan into a physical form. Is seems too simple to be true but it has been tested in several studies and results show that it can more than double your chances of following through with a plan. Its very simple to ignore your plan if you only have an idea of it. If you have it written down, staring at you, it creates a physical form of self-accountability that makes you much more likely to stick to your trading plan. I recommend buying a dry-erase board to write down specifics of your trading plan and have it in front of you as you are trading. You can also simply use a notebook to do this. Of course, you trading plan will be tailored to your plan and areas you want to improve on, but some good rules to follow are your set positioning size, max loss for the day, and ideal entries and exits.

1) Position sizing

Write down how much you are willing to risk on any given trade. Of course, advanced traders will learn when they can size up to take advantage of great setups, but for beginners, you should have a set max amount you are willing to lose on a trade. Having a dollar amount written will help you determine how many shares you can buy at a certain price, based on your stop-out point. Here is an example:

• Max risk: $50
• Current Stock price: $7.45
• Stop-Out Price: $6.95
• Max Shares to Buy: 100 Shares

2) Max loss

There are days where you start off taking a loss and you end up trying to get revenge on the market all day, digging yourself into a deeper hole. Too many times, traders get lured into this trap and end the day with substantial losses, which could have been avoided by simply leaving the market when their emotions got too hot. A very effective way to prevent this, which almost all successful traders will agree with, is to have a max loss dollar amount for the day, where you can stop trading for the day and collect your mind and emotions. Again, having a set number written on your dry-erase board or in your notebook will increase your chances of sticking to it than if you just have a number in mind.

3) Entries/Exits

When you enter a trade, you want the probabilities to be on your side, so you want to make entries at price levels where you have a good risk/reward ratio. Like in my example in the first paragraph of this post, sometimes you see a stock making a huge run and just want to get in. FOMO (Fear of missing out) gets to all of us sometimes. These emotions can lead to taking trades way off of support levels with the chance of only profiting slightly compared to the risk. This is BAD risk/reward. It is good practice to draw lines at support and resistance levels and base your entries and exits off those lines. Write down the price levels where you can get in to have an ideal risk/reward level and where you will aim to take profits. Here is an example:

• Ideal risk/reward: 1/3
• Current Stock Price: $7.45
• Next Support Level: $7
• Next Resistance Level: $8
• Ideal Entry: $7.25

$7.25 would be a good entry because you can risk 25 cents off of the $7 support, while aiming for 75 cents of profit, giving you a 1/3 ( or 25/75) risk/reward ratio. Having the odds on your side is absolutely crucial to profitability. Simply writing down these ideal entry an exit points will get you closer to becoming a consistently profitable trader.


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