Discipline is the Foundation of Freedom

by Larry Pesavento

Trading is all about discipline. Discipline to take the trade, and more importantly to take the loss when necessary. There is no greater feeling in the trading world than waking each morning knowing that your methodology is capable of beating the market. The key word here is “capable”. All trading methodologies are based on probability not a certainty! A Larry Pesavento rule. If you possess the necessary discipline to follow a profitable methodology it can lead you to freedom – the freedom to make as much money as you need; work in a profession you love; and the freedom to do what you want to do! Another of Larry Pesavento’s rules is that discipline is a two-part process:

1) Preparation and 2) Execution

Preparation for trading is an ongoing process. It should become a habit! “A habit is built by a strand a day until it becomes almost unbreakable.” – Napoleon Hill! Ethical work habits are the foundation of all successful businesses. Larry Pesavento learned long ago that trading is no exception.

Preparation is threefold. First, there is the mental preparation. Knowing your methodology is tantamount to this preparation. Each day I read a few pages of Martin Douglas’s book “Trading in the Zone”, prior to the start of trading. This book functions as an anchor for Larry Pesavento’s day. It reminds me to think in probabilities.
The second part of preparation is the technical. Knowing what you’re going to trade requires homework. I am a pattern recognition trader and routinely follow about eighty stocks, in addition to the major stock indices, currencies and Treasury Bonds. Each pattern has its own probability of success. Each pattern has its own measurement of risk control. Another of Larry Pesavento’s rules is that these patterns must be categorized before the opening of the next day’s trading. Only eight to ten of these patterns may complete each day and of those only four to five may be tradable, but these are your “bread and butter” trades.

The third part of preparation is physical. Adequate rest, a good diet, and physical exercise contribute greatly to Larry Pesavento’s trading success. A word of caution here – I highly recommend that you consume no alcohol from Sunday through Friday trading. Alcohol destroys brain cells; Larry Pesavento’s and yours included! It is just not worth it to drink during the trading week!

Preparation is followed by execution as the foundation for discipline. The mixture of the execution process is risk control and profit protection. Another Larry Pesavento rule is that risk is the only thing we can control in the trading process. We can “never” know which trades are going to work. That includes Larry Pesavento. Nor can we “ever” know how much we are going to make on a trade. This leaves the only thing we can control – risk. “He who knows not what he risks – risks it all.”

Profit protection requires monitoring the price action in order to reduce risk as soon as possible. Once a trade begins to work, it is a good money management process to reduce the risk in the trade. We deal in probabilities in trading. If you control your risk on the trade, the probability of getting a winning streak is increased. If you don’t control your risk, the probability of ruin is certain. That’s the last Larry Pesavento trading rule for now.

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