Defining Discipline In Markets
The first rule that traders and investors must embrace is there are no rules when it comes to prices. Bull and bear markets can take asset prices to illogical, irrational, and unreasonable levels. The price of an asset is a snapshot that always reflects the correct value because it is the level where buyers and sellers meet in a transparent environment, the marketplace. While some market participants complain about price manipulation, every buyer requires a seller and vice versa.
Discipline is the ability to follow the rules or a code of behavior, using punishment to correct disobedience. In markets, the penalty is losses, and rewards come in profits. Discipline is critical for successful trading and investing; over time, it is the primary factor separating winners from losers.
The first step towards success is to define market discipline, which requires work.
Understand the difference between a trade and an investment
- Trades are short-term long or short risk positions.
- Investments are medium to long-term risk positions.
- Technical factors are critical for trading.
- Fundamentals play a more significant role in investments.
Understand the market’s tools before using them
- The markets provide a wide range of products to traders and investors.
- Futures and options are critical tools that can enhance and mitigate risks.
- Understanding the tools requires work and study.
Construct a plan before initiating a long or short position
- Planning increases the odds of success.
- Risk versus reward is the critical component of any plan.
- Planning comes before buying or selling to execute a trade or investment risk position.
Never attempt to buy bottoms or sell tops- Respect trends
- Markets tend to move to illogical, irrational, and unreasonable levels on the up and downside.
- Buying bottoms or selling tops depends on luck, not skill.
- Searching for bottoms or tops is all about ego and emotions as it is a statement the market is wrong.
The market price is always the correct price- Keep the losses under control
- The current price is always the correct price.
- Even the most successful traders and investors are wrong all the time- Markets are always right.
- Sentiment drives prices higher or lower.
- A plan involving risk-reward dynamics mitigates losses and enhances profits.
- Risk positions are long or short at the current market price, not at the original execution levels- Reevaluate risk-reward dynamics as a market moves higher or lower.
- Avoid letting profits turn into losses or running losses past the original risk level.
- Running profits enhances overall results, but risk levels must reflect the current market, not the original execution levels.
Remove emotion from the equation
- Emotions are the enemy.
- Fear and greed cause mistakes.
- Planning and sticking to a program suppress emotions, reducing the potential for fear or greed to drive behavior.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!