Editor’s note: Daina Schnese here, managing editor of Trading With Larry Benedict.
Last week, Larry taught traders the right way to take a loss. And it starts with accepting that “one trade doesn’t define you.” He also introduced us to the third pitfall new traders fall into: They lack discipline.
Larry has lived and learned all three pitfalls as a trader. He learned the first two, not earning your risk and going for the home run on every trade, early on in his career by burning through all of his money multiple times.
Today, Larry shows why having discipline is mathematical. And he gives three tips for finding discipline that will help you become a successful trader, whether you’re new or experienced…
Daina Schnese: Let’s jump right in today. You said the third pitfall new traders fall into is they lack discipline. How do you define discipline, in terms of trading?
Larry Benedict: Discipline is being able to take risk when you’re doing well… and being able to sit on the sidelines when you’re not. But it’s not risk for the sake of risk, it’s calculated risk.
For example, I spoke to a new trader recently, and he said “the one thing you taught me was when you’re doing well, press… And when you’re not doing well, don’t press.”
I was always good at sitting on the sidelines and watching the tape when I wasn’t trading well. I would study what went wrong, and how I could correct it next time. And I knew how to press when I was trading really well by adding larger position sizes. That’s calculated risk.
Daina: Why do most traders lose their discipline?
Larry: Well, they let their fear and emotions get too involved in their trades. I never lost my discipline and went all-in on one trade. It was really key to helping me make my fortune.
A lot of traders that I managed, and I’ve managed hundreds of them while running hedge funds, couldn’t even pull the trigger or make the trade. They were scared to lose their job, money, or they just let their fear get in the way…
But that’s what makes me different than most traders. I know it’s a popular baseball metaphor, but do you want to go down swinging or get caught looking at the third strike? I never wanted to go down looking at the third strike. I was aggressive. And it took years to tame that aggressiveness into money-making prowess. All I was missing was discipline.
What makes a successful trader is having discipline with the confidence and ability to take risk. One of the hardest things in trading is taking risk, even if it’s calculated. Trust me… I walked 12.5 miles yesterday because I couldn’t sit in front of the risk in a couple trades I’m in.
While I still get fearful that something could go wrong, I have my strategy and I don’t deviate from it. So there’s a confidence that comes from years of doing the same thing, over and over again… slowly grinding out profits. Win after win, until I have a huge base of capital under me.
Remember, if you’ve been trading really well and have a strong base of capital under you, you’ve earned your risk. I’d say most traders lose their discipline when they change their strategy based on a loss or fear of a loss.
You have to keep your discipline whether you’re winning or losing. It’s mathematical. You have the number you take profits at, and the number you get out of a trade at.
Daina: For someone new to trading, how do they know when to take profits and when they should get out of a trade?
Larry: It really comes down to your goals of what you want to make. And that gets executed with stop losses and your profit percentages. You have a percentage loss you won’t go below, a profit percentage you will always look to take… and you don’t deviate from that.
Everyone’s portfolio size is different, and the amount of money they’re trading with will vary. But on the downside, I’d set a stop at 2-5% loss maximum. And I wouldn’t ever deviate from that, no matter how emotional I got about the trade.
It’s the same with the upside target, in that it depends on what my goal is to make and how large of a position I have. But, it would be around the same percentages… 2-5% on the upside.
That sounds small. But I average 50-70 trades per day. Grabbing a few thousand here, a million there, another few million again… that adds up really fast.
Daina: So would you say discipline is just having goals and implementing a strategy that you don’t deviate from? Or is there more to it than that?
Larry: As I’ve said before, it can take a while to become a successful trader. That’s why you work to put a small profit on the page every single day, until you can earn more risk and know what the heck you’re doing.
But there are different ways you can learn to become disciplined. For starters, if you’re a new trader, you don’t want to try to go about it on your own. I’d say step one to finding discipline as a trader comes from finding a mentor. Someone who’s a successful trader, like myself, who can educate you on the fundamentals of trading.
Step two is to become an expert at one thing, versus trying to be average at many things. You pick a handful of stocks and learn them inside and out. Tom Brady isn’t training to become the next major league pitcher. He’s a Super Bowl winning quarterback because that is what he lives and breathes.
Finally, the last step is to then incorporate consistency and really become formulaic. Which is what we started to get into today. You have a strategy, you don’t deviate, and you let profits slowly trickle in.
Daina: So it sounds like there are three ways you’d suggest traders look to gain discipline. That’s great, and we can dive into the first one – finding a mentor – the next time we talk. Thanks, Larry.
Larry: No problem, thank you.
About Larry Benedict
Larry is a former hedge fund manager with over 30 years of investing experience. He’s also known as one of the world’s best traders… and for good reason.
From 1990 to 2010 – when he was actively running hedge funds – Larry never had a single losing year.
Larry’s market commentary is frequently featured in Bloomberg, Barron’s, and The Wall Street Journal, among other major news outlets.
Source: Opportunistictrader.com | Original Link