Specialty Skills

Trading Rules: It’s Also About Your Approach

Dr. Woody Johnson

For most of you reading this, the notion of rules and their importance to your trading may be a “no brainer” and I certainly hope that’s the case. But, some of you have some serious issues with following the trading rules that you have identified. In other words, even though you may be “talking the talk” – you’re not “walking the talk.” And, you’re not alone. Every day literally millions of traders across the planet are violating rule after rule; and in a lot of these cases they are perplexed as to why they keep doing things that a moment ago they were adamant that they would not do, like moving a hard stop-loss as the price action is inching toward it. Or, on the other hand, failing to do something that they promised that they would; for instance, finishing that “trade plan.” I’ve discussed these very important points in past articles, but in this missive I’ll be discussing another key item with regard to trading rules which has to do with your “approach.”

There are traders that are treating their rules as indicators of what they could follow rather than what they must follow. Some traders think that rules are discretionary and sometimes they follow them and sometimes they don’t; this type of thinking destroys trading results. Trading with a weak commitment to your rules is just as serious, if not more, than not knowing why you violate rules over and over again despite the initial desire to follow to them. To really support your trading, rules must be approached with an iron-clad commitment to keeping them under any and all circumstances, otherwise they become little more than window dressing on the trade.

Rules are trade-capital protectors and can be considered a life jacket in a stormy sea because they are designed to inform your decision making when you are in the shark infested ocean of trading. For that reason rules are essential to trading. Warren Buffet, an investor superstar, has been quoted as having said, “There are two rules for trading. Rule #1) Don’t lose money. Rule #2) Don’t forget rule number one.” Rules represent a governing action because they dictate your behavior given certain parameters. For instance, with regard to money management, risk no more than 2% of your account in any trade. In order to support your trading in the best way possible, rules must be inviolable unless and until you have deemed that they are in part or whole no longer effective. This determination is made through using your documentation process and identifying from your feedback what is not working and then modifying or completely changing that rule. Otherwise, while your trading rule is still in play it must be untouchable. One of the reasons for maintaining this approach is that if your rules are “flexible” not only will their ability to serve you be compromised, it becomes very easy to waver in the face of internal conflict when emotions like fear and greed begin to create rationales for deviating from the plan. In fact, every time a trader fails to follow a rule it becomes easier to disregard it the next time…and so on. Discipline and good habits are both built the same way, one trade at a time. Well thought out rules that are followed to the letter make the difference between being successful and blowing up your account.

Free Trading WorkshopSo, it’s critical to approach your rules by first being accountable for your results. Your rules are there to assist you in maintaining focus on what matters most in your trade plan and follow-through. As you continue to “honor” your rules consistently you will develop powerful habits surrounding your ability to follow-through and keep personal commitments. Uphold the conceptual fact that you are responsible for your decisions by using your documentation process to learn from “the data” of your trades which will inform your trade development and provide the evidence as to whether the rule in question is a diamond or a dud. If it’s a dud, modify or eliminate the rule. Until then it is considered “in play” and cannot and, therefore as far as you are concerned, “will not” be violated, compromised or “tinkered with.” Remain consistent; do not modify a rule or principle in order to conform to the market. Instead, let the market conform to your rule and follow the rule without deviating. “If you stand for nothing, you’ll fall for anything.” Alex Hamilton

Remember, trading from your highest and best self and in your highest and best interests are all that matters to your trading results. Trading is like venturing out on the high seas, you must be prepared with the proper vessel, apparatus and navigation gear to ensure that the destination is accomplished. So, let your rules be your navigation instruments to take you to consistent trading results. This is what we teach in Mastering the Mental Game Online, On-location and XLT. Ask your Online Trading Academy representative for more information. Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”

Happy Trading,

Dr. Woody Johnson

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.