I had 2 experiences last week which could be described as two evils of trading discipline:
- Breaking rules and being rewarded for it
- Following rules and being “punished” for it
Both of these can be very harmful, especially to new traders in becoming consistently profitable and disciplined traders.
Breaking rules and being rewarded for it
While in a euro trade, instead of stopping out at a planned 20 pip stop when trade went against me, I moved my stop and let the position go 40 pips against me, where not only did I risk double the amount of the original plan for that trade, I added another same size position, resulting in break of second rule: adding to a losing position.
When trade got back just about break even within about an hour I sold it, breaking the third rule of letting stops take me out of position, instead of taking profit at particular targets, thus trying to produce runners.
Ultimately I executed a trade with unlimited risk and no profit potential during which I broke three rules.
When looking at the end of day summary, I was up on 10 of 12 trades for the day with a profit factor of 120! (dollars made/dollars lost)
Seeing such performance might seem like a great day, but it is “fool’s gold” and being rewarded for bad habits can and probably will be destructive for traders performance if one doesn’t realize it fast enough
Following Rules and Being “Punished” for it
Another trade took place on Friday afternoon, I entered it based on one of my setups and without getting stopped out closed the position for a loss, since per my trading rules I do not hold any positions over the weekend, especially in such economic news sensitives crazy instrument as Gold futures. Within minutes of futures open tonight, Sunday night, gold plunged over $6 reaching my ultimate target of 200ema hourly and S1 pocket.
Following my rules and closing out position before the weekend, without letting either stop or target being hit ulatimately made a $1500 difference on this trade, but I was disciplined and followed me rules perfectly.
Being rewarded for bad trading and being “punished” for good trading, can really create wrong psychological associations with particular trader behavior and might lead to very destructive tendencies especially for newer traders.
While first scenario of terrible discipline yielded amazing results for that overall day and second trade of following rules perfectly resulted in a loss, trader has be able to step back and review all the trades and realize that regardless of trade performance, in this particular case the first trade was a bad trade and second was a good trade.
Hope this helps