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What is Day-Trading Discipline

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"People often ask me, "What is the single most important personality trait of a day trader?" Almost as often, they are surprised by my one-word answer-- discipline. In my experience of teaching thousands of individuals to day trade, I've found that the ultimate determining factor in success is not education, analytical ability, risk tolerance, or the like. The determining factor in 99.9% of cases is discipline. The discipline to follow the rules of day trading, the most important of which is no overnights."

-Fausto Pugliese, President and Founder of Cyber Trading University

It's Called Day Trading For a Reason

It's called Day Trading for a reason, you start trading in the morning and you get out before the marker closes Just about every investor makes his or her trades during the day. The reason it's called "day trading" is because we open and close all positions during the same trading day. In other words, true day traders start each day with no open positions, make trades during the course of that day, and end each day as he started it, with no open positions and with no exceptions.

Of course, this is a pretty easy rule to follow when you're making money. If your trade is showing a positive return, you'll have no problem cashing out the position by the end of the day and taking your profits. That's only logical. However, it becomes more difficult to follow the rule if it means cashing out a losing position. For example, let's say you bought a stock late in the day at its support level, expecting to sell it as it bounced back up near its resistance level sometime before the closing bell. Yet, for some reason, the stock broke through its support level, and now you're looking at, say a $1,000 loss on the trade as the closing looms.

No Overnights With Discipline

In this case, it will be tempting to hold onto the stock with the hope that it resumes its normal trading pattern at the opening bell, getting you back near even. A voice inside your head will say, "Hey, why close out a losing position that might turn into a winning position if I just wait an extra day?" Ignore that voice! It's the voice of a financial ruin

And if you think I'm being overly dramatic, I'm not. I've seen the results of what happens to Day-Traders who had this voice. A friend of mine was down about $1,500 in a particular stock one day, which was an unusually large loss on a single stock for him. However, rather than taking his medicine at the end of the trading day, he thought, "Why not hold it overnight and see what happens on the morning bell? It couldn't get much worse, right?" Wrong, the market could be bullish and it still wouldn't be a good idea.

No Discipline: The Risks in Day Trading

After the bell, the company reported catastrophic news-- accounting fraud, insider trading, you name it. This news caused the price of the stock to drop $50 per share at the market open on the next day. My friend, who was holding 1,000 shares watched his original loss of $1,500 balloon into a $50,000 shortfall

Now, I'd like to say this is the sad end of the story, but it isn't. Desperate to recoup at least some of his investment, he then dumped the rest of his funds into the stock at the reduced price with the hope that just a small increase in the stock would make up for his loss. Over the next few weeks, the stock fell another 80% in value, and he was completely ruined. Why? Because he decided to keep a stock overnight to avoid a small loss.

Now, don't get me wrong. This level of devastation won't happen every time you overnight a stock. The problem is that it doesn't have to happen every time -- just once is enough to wipe out your entire life savings. This is why discipline is so important in day trading. The discipline to avoid the temptation of waiting "just one more day" can make all the difference.

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