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25 Rules of Trading Discipline by Douglas E. Zalesky

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The success that a trader achieves in the markets is directly correlated to one’s trading discipline or lack thereof. Trading discipline is 90 percent of the game. The formula is very simple: Trade with discipline and you will succeed; trade without discipline and you will fail.

I have been a trader and member of the Chicago Board of Trade (CBOT) for 20 years. During my successful pit-trading career as a scalper, I traded in three different contract markets: 30-Year Treasury bonds at the CBOT, the S&P 500 at the Chicago Mercantile Exchange (CME) and the Gilts at the London International Financial Futures Exchange (LIFFE). Currently, I also trade the electronic $5 Dow futures contract on the CBOT as time permits.

Although my formal academic education consists of a bachelor’s degree in business administration from the University of Denver, I never considered myself to be an extremely gifted student. I have no formal training in market technical analysis. I’m unable to even set up a Fibonacci study or Moving Average study on a charting package, let alone know how to trade with such data. I have no formal training in market fundamental analysis. I don’t understand the economic causal relationship between the actions of the Federal Open Market Committee and Treasury bond prices or equity prices.

How, then, have I been able to succeed, day after day, trading the markets for more than 20 years? The answer is simple: I trade with discipline, and I respect the market. When I’m wrong I get out immediately, and when I’m right, I don’t get too greedy. I’m content with small winners and I’m accepting of small losers.

Just as I now mentor my trading clients regarding performance, discipline and profit/loss management, I was mentored by one of the best traders ever to set foot on the CBOT trading floor, David Goldberg. David was a long-time spread scalper in the wheat pit and a principal of Goldberg Bros., at the time one of the largest clearing firms at the CBOT, CME and Chicago Board Options Exchange (CBOE). David taught me the rules of trading discipline. I listened to his guidance and gradually, over time, became more and more successful. The student has now become the teacher.

The Wheel of Success

There are three spokes that make up, what I call the “Wheel of Success” as it relates to trading. The first spoke is content. Content consists of all the external and internal market information that traders utilize to make their trading decisions. All traders must purchase value-added content that provides utility in making their trading decisions.

The most important type of content is internal market information (IMI). IMI simply is time and price information as disseminated by the exchanges. After all, we all make our trading decisions in the present tense based on time and price. In order to “scalp” the markets effectively, we must have the most live and up-to-date time and price information seamlessly delivered to our PCs through a reliable execution platform and/or charting package. Without instantaneous time and price information, we would be trading in the dark.

The second spoke is mechanics. Mechanics is how you access the markets and the methodology that you employ to enter/exit your trades. You must master mechanics before you can enjoy any success as a trader. A simple keystroke error can result in a loss of thousands of dollars. A trader can ruin his entire day with an inadvertent trade entry error.

Once you have mastered order execution, though, it is like riding a bike. The process of entering and exiting trades becomes seamless and mindless. Fast and efficient trade execution, especially if you are trading with a scalping methodology, will enable you to hit a bid or take an offer before your competitors do. Remember, the fastest survive.

The third and most important spoke in the Wheel of Success is discipline. You must attain discipline if you ever hope to achieve any level of trading success. Trading discipline is practiced 100 percent of the time, every trade, every day.

Review the following 25 Rules of Trading Discipline. You must condition yourself to behave with discipline over and over again. Many of my traders and clients read through the rules every day (believe it or not) before the trading session begins. It doesn’t take more than three minutes to read through them. Think of the exercise as praying — reminding you how to conduct yourself throughout the trading session.

1. The market pays you to be disciplined.

Trading with discipline will put more money in your pocket and take less money out. The one constant truth concerning the markets is that discipline = increased profits.

2. Be disciplined every day, in every trade, and the market will reward you. But don’t claim to be disciplined if you are not 100 percent of the time.

Being disciplined is of the utmost importance, but it’s not a sometimes thing, like claiming you quit a bad habit, such as smoking. If you claim to quit smoking but you sneak a cigarette every once in a while, then you clearly have not quit smoking. If you trade with discipline nine out of ten trades, then you can’t claim to be a disciplined trader. It is the one undisciplined trade that will really hurt your overall performance for the day. Discipline must be practiced on every trade.

When I state that “the market will reward you,” typically it is in recognizing less of a loss on a losing trade than if you were stubborn and held on too long to a bad trade. Thus, if I lose $200 on a trade, but I would have lost $1,000 if I had remained in that losing trade, I can claim that I “saved” myself $800 in additional losses by exiting the bad trade with haste.

3. Always lower your trade size when you’re trading poorly.

All good traders follow this rule. Why continue to lose on five lots (contracts) per trade when you could save yourself a lot of money by lowering your trade size down to a one lot on your next trade? If I have two losing trades in a row, I always lower my trade size down to a one lot. If my next two trades are profitable, then I move my trade size back up to my original lot size.

It’s like a batter in baseball who has struck out his last two times at bat. The next time up he will choke up on the bat, shorten his swing and try to make contact. Trading is the same: lower your trade size, try to make a tick or two — or even scratch the trade — and then raise your trade size after two consecutive winning trades.

4. Never turn a winner into a loser.

We have all violated this rule. However, it should be our goal to try harder not to violate it in the future. What we are really talking about here is the greed factor. The market has rewarded you by moving in the direction of your position, however, you are not satisfied with a small winner. Thus you hold onto the trade in the hopes of a larger gain, only to watch the market turn and move against you. Of course, inevitably you now hesitate and the trade further deteriorates into a substantial loss.

There’s no need to be greedy. It’s only one trade. You’ll make many more trades throughout the session and many more throughout the next trading sessions. Opportunity exists in the marketplace all of the time. Remember: No one trade should make or break your performance for the day. Don’t be greedy.

5. Your biggest loser can’t exceed your biggest winner.

Keep a trade log of all your trades throughout the session. If, for example, you know that, so far, your biggest winner on the day is five e-Mini S&P points, then do not allow a losing trade to exceed those five points. If you do allow a loss to exceed your biggest gain then, effectively, what you have when you net out the biggest winner and biggest loss is a net loss on the two trades. Not good.

To read the remaining 20 rules, head over to the original article titledThe 25-Point Mantra: Discipline for Day Trading on SFO Magazine.

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During his career, Douglas E. Zalesky was an Independent Floor Trader in the US 30-Year Treasury Bond Pit (CBOT) from 1983 to 1988. In 1988, Doug was a member of the London International Financial Futures Exchange where he was an Independent Floor Trader in the UK Gilt Pit. From 1989 to 1991, he returned to the CBOT as an Independent Floor Trader in the Bond Pit. In 1991, he became a member of the Chicago Mercantile Exchange where he was an Independent Floor Trader in the S&P 500 Pit. Sadly, Doug passed away on September 24, 2009

This article is republished in part by permission of the original publisher, SFO Magazine. No further reproduction is allowed without the express permission of SFO Magazine.

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