Trading Rules Are Your Safety Net

Originally published on, October 31, 2011.

Humans, you and I, have been programmed. This programming began in infancy and continues throughout life. However, the most powerful programming takes place in those early years between 0 and 5. This programming equates to beliefs, values, and stories you tell yourself about how life is and came to be.

These stories have been constructed much like a script to a play, and that play is your life and the scripts to that play are your stories. These stories or scripts can also be termed rules that form the foundation of your behavior.

In fact, over time and as humans grow, they develop a set of typical responses to reoccurring events. These typical responses, or patterns of behavior, could be termed a list of rules that you live by.

For example, when someone speaks, it is customary that you speak back. If you incur a debt, you are expected to pay it. If you are driving, there are rules to follow for both safety and the orderly movement of traffic. These lists of "rules" are reflected in every decision of your life.

These rules or life stories also involve the lessons that you have learned in life from your earliest years, and those lessons have created the cultural lenses through which the world is seen and judged; rules about money, privilege, power, worthiness, winning, and losing.

For the most part, these stories or rules never see the light of day in your awareness. You make important choices based upon these life rules, and when you get results that you don’t want, changing the outcomes can be and often is very difficult.

In other words, if your choices go unchallenged, then the awareness of why you made the choice remains out of conscious touch. However, once the rule is identified, it can be challenged and modified, if need be.

Also, as you challenge each rule, you uncover other assumptions that were based upon that rule being truth rather than myth. The interesting thing about mythology is that if you believe it to be real, then to you, it’s not mythology; it is truth.

Consider this: Trader Dan believes in "taking advantage of every opportunity in life;" this belief becomes truth in his mind and generally may not be a problem for him. However, in the markets, there is a distinct disadvantage to overtrading. In fact, this simple yet powerful "market myth" can cause your downfall in trading even though it can serve you in other parts of your life.

Other "fools’ rules" or trading myths might be:

  • Get back to even by doubling down on losers
  • On a price action pattern, jump in early to make the most profit
  • Stops only take me out too early, it will always come back
  • Big position size makes big money
  • I can trade as many times a day as I want; the more I trade, the more opportunities I have to make money

Because the market is a unique cultural phenomenon, it does not resonate with most accepted cultural myths. So, for the most part, the filter or mental model that you have will frequently conclude something inaccurate unless you re-program the mental model that it came from.

That’s why intelligent and educated people can succeed at any other business and fail at trading; because the usually effective life model that works in the real world is not the same paradigm that creates price action.

So, to re-program those unconscious beliefs or life rules, we must begin to uncover the mental models that you use. You must identify where they show up in daily trading; consider the above example of overtrading that could stem from an unconscious belief around taking advantage of every opportunity…no matter how weak or non-existent the plan associated with the perceived "opportunity" is.

If we examine it even closer, we might uncover a fear associated with missing out on a perceived potential profit, and below that may be the fear of appearing not smart enough or good enough.

Let’s look at how it might show up in your trading journal with this example, where the trader is grappling with an urge to violate a rule and chase a trade:

"…I’m dealing with the thought that ’I’ve got to get in on this trade,’ or ’I’ve got to make up for the last loss’ … No, I do not ’have’ to force a trade in order to make up for the last loss. I will wait for the next high-probability, compelling set-up to trade, and if it doesn’t come along today, then that’s OK—I’m a lover of reality."

One of the ways that you fall prey to self-sabotage is trading from rules that don’t work — and these rules may be all or in part unconscious. Most have experienced self-sabotage, also known as “shooting yourself in the foot.” It is behavior that is in direct contradiction to what you know to be in your best interest.

Does the below sound familiar?

Tracy knows the value of identifying the trend, locating significant support and resistance, and waiting for retracements in order to discover high-probability entries. In fact, her trading rules specifically state that before entering, she will pause, check all time frames, re-check support/resistance levels, and wait for a retracement on a trending market.

However, with the rise of a high-momentum green candle on the five-minute chart, the excitement gets the best of her and she impulsively enters, only to immediately watch it retrace and stop her out for a loss.

Upon looking back at the trade, she then realizes that there was a significant support zone on the 60-minute chart, signaling a high-probability reversal. If she had followed her trading rules, she would have been following the order flow, identifying where the loser is likely to trade, and she could have taken the other side to be in sync with the order flow.

The meaning here is that self-sabotaging behavior looms on the horizon at every turn, and unless measures are taken to increase your awareness of your own internal mythology, you will most likely execute in the wrong spot relative to actual order flow, turning what initially promises to be a winner into a loser.

You can’t change what you can’t face, and you can’t face what you don’t know. So, use a thought journal in order to discover thought patterns and raise awareness of internal mythology in order to "dance with the market." In this way, you are able to follow the lead of the order flow.

It takes diligence, consistency, and time to first become aware, and second, to change ineffective patterns. A thought journal helps through questions like these:

  • What is my analysis of this trade?
  • Why do I want to enter at this point in the order flow?
  • What is my target and why did I choose it?
  • Why do I trust my analysis?
  • Who told me it would work and why do I believe it?

A thought journal can be handwritten or typed, on a notepad or input into a log along with daily inputs of trade results. Your thought journal is an invaluable tool in uncovering the fools’ rules that are driving your trade decisions and consequently causing results that you don’t want.

By uncovering your self-sabotaging rules, you can then begin the reprogramming process because you will have access to the faulty data and can then impart change.

This is what we teach in “Mastering the Mental Game;” that is, the tools, techniques, and concepts to identify the underlying core issues, root them out, and neutralize and replace them with empowering self concepts.

We show you how to develop your "A" game, which is absolutely essential in the psychological warfare that is trading in the financial markets. Ask your Online Trading Academy Education Counselor for more information. Also, get my book, From Pain to Profit: Secrets of the Peak Performance Trader."

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