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Why Self-Discipline Is Essential For Forex Traders

Forex trading demands a whole range of skills, from technical analysis to market knowledge and emotional maturity. However, to all this the successful trader needs to add another essential ingredient to make it all work together: discipline. Here’s a closer look at what discipline means in the context of forex trading and how you can develop or improve it.

 

What does discipline mean in forex trading?

The Collins Dictionary defines discipline as “the quality of being able to behave and work in a controlled way which involves obeying particular rules or standards.” In forex trading, this means being able to develop and stick to your trading strategy, always following your risk management plan, and maintaining an objective viewpoint at all times. 

 

It may also encompass other factors, such as keeping your learning and market knowledge fresh and current, furthering your technical knowledge, and being able to stick to a daily trading routine. 

 

Why is discipline considered to be so important in forex trading?

Successful forex trading requires above all a structured approach, so that all your trading decisions are based on the current market conditions, and are aligned with your personal trading strategy and goals. A casual or haphazard approach to trading means that sooner or later you are going to make mistakes that could lead to heavy losses.

 

Trading requires you to make quick decisions under pressure, and when the stakes are high it takes effort to overcome powerful emotions such as fear, anxiety, and greed. Experienced traders work hard to manage their emotions, and learn not to be swayed too heavily by the prospect of failure or success.

 

How do you develop discipline as a forex trader?

Self-discipline can be practised by anyone, no matter what their personality type is. It is not an innate trait we are born with, but it is something that can be learnt. Like a muscle, the more we work at it, the stronger it gets. 

 

At the beginning of your trading career, you will make mistakes and experience a few lows, but the right mental attitude will carry you through to more long-term success. Here are some points that will help you to develop and maintain the right mindset.

 

Set clear achievable goals

It can be easy to become overwhelmed by the prospect of learning how to be a successful forex trader, and this can lead to a sense of paralysis. Instead of getting bogged down in detail, set yourself a series of clear and realistic goals to work towards. 

 

Avoid setting numerical targets, such as needing to make a certain amount of profit each month. If you have given up your day job and intend to make your living as a forex trader, you may expect to earn a fixed amount of money each month to replace your salary.

 

 However, there is no such thing as a steady income in forex trading, and even the best traders will make a variable monthly amount. Chasing numerical targets can lead to poor trading decisions, and is unlikely to yield the best results. Profits are the byproduct of a disciplined trading system, and not a goal to be single mindedly pursued. 

 

Instead, use the following methods to keep you on the right track.

 

Set out your trading strategy

A well defined trading strategy is the key to successful forex trading. This should include which signals you will use to enter and exit the market, what your maximum number of trades per day or week will be, and what hours you will be trading each day. You should also decide if you prefer short term trading or long term trading.

 

Work out your risk tolerance

It is absolutely essential to know how much you can realistically afford to lose on each trade before you begin trading. This may depend on how comfortable you are with risk and how much capital you have at your disposal. You should never expose yourself to damaging losses that would compromise your ability to pay for life’s essentials.

 

Use a stop loss

Stop losses are a tool that enables you to automatically exit a trade at a specified point below the entry price. They can act as a buffer against volatile and unpredictable market conditions, so if the price action suddenly swings against your expectations, you will be protected from uncontrolled losses.  

 

This can help to guard against the natural human tendency to hang onto a losing trade in the hope that the situation will turn around, rather than to cut your losses and run. If you think that you have enough presence of mind to decide for yourself when to exit a trade, remember that almost all professional traders use stop losses.

 

When we are faced with a difficult decision under pressure, most of us will subconsciously follow some kind of cognitive bias. Assuming that you are immune to such human frailties will only put you in a weaker position, because like it or not, all humans experience powerful  emotions and denying them can be dangerous in forex trading. 

 

When faced with the prospect of making a bigger profit or trying to avoid a loss, even the most stoical of personalities will have a natural tendency to either reach for more or hedge against a losing position. This is a primal evolutionary instinct leftover from the times when it literally meant the difference between starving or surviving. 

 

A predetermined exit strategy such as a stop loss is based on objective and rational information only, which is ultimately what forex traders should be aiming for at all times. This brings us nicely onto the next point…

 

Understand forex trading psychology

A major part of your discipline as a forex trader is learning to manage your emotions. As we have already discussed, letting your emotions bias your trading decisions can be potentially disastrous. Some people hold the belief that admitting to their feelings is a weakness, but in fact it can put you in a much more empowering position, in life as well as in forex trading. 

 

No one is immune to psychological bias, and being able to recognise them in your own thought and behaviour patterns is key to avoiding the trading pitfalls that they can open up. Here are some of the most common biases in forex trading.

 

Overconfidence bias

This is a very common bias in novice traders who have experienced their first flush of success. After all the hard work of learning the ropes and feeling like a newbie who doesn’t quite know what they are doing, a string of profitable trades can be a huge ego boost. 

 

There is nothing wrong with taking some time to enjoy your success; after all, if we didn’t allow ourselves to enjoy the fruits of our labour, it would be rather miserable and demotivating. Taking some time to work out what you did right is also important, because it strengthens your trading strategy. 

 

However, some traders are prone to become too intoxicated by their success, and assume that every future decision will be right. This can lead to a relaxing of discipline and poor trading decisions will be the result. No matter how well you have done, do not be tempted to ease up on the rigours of daily market analysis and strict risk management.

 

Loss aversion bias

The flip side of overconfidence bias is loss aversion bias. This is when a trader is too conscious of the prospect of loss, and this hampers the ability to pursue profits. For many people, the fear of losing overrides the instinct to make gains, and it can lead to overcautious decisions. 

 

Forex trading is all about learning to take managed risks, based on daily market research and analysis. It does not pay to be either too cautious or too confident, but to learn how to put your emotions or biases to one side and make objective decisions at every stage.

 

Keep a regular trading journal

This is one of the most repeated pieces of advice to new forex traders, but it really is one of the most effective tools you can use to develop and improve your trading skills. It does take some discipline to add yet another task onto your daily checklist, especially when you may not notice the immediate benefit. 

 

By recording what trades you have made and when, and the reasons why you made them, plus any other thoughts or observations you may have at the time, you will have a brilliant resource to refer to in the future. It can help you identify patterns of success, or pinpoint what went wrong if you have a run of poor trades, leading to a stronger strategy going forward.

 

Guard against your comfort zone

Once you have found your feet in the world of forex trading, and are starting to build up a record of steady profits, it can be tempting to take your foot off the gas for a little while. Be on your guard against settling into a comfort zone, and always push yourself to remain open to new opportunities.


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CFTC Rule 4.41 – Hypothetical or Simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, because the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs, in general, are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown.

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