Lessons from the Pros


Do You Use Trading Rules or Patterns?

Have you ever listened to somebody try and explain the reason why they took a trade and it drove you crazy listening to it?

I have heard all kinds of attempted explanations for why trades were taken.  It usually starts out with a pause and glance up to the ceiling when you ask.  Then comes the rapid speed talk trying to explain it.  Then when they finish they say, “Know what I mean?”

The story sometimes goes like this: “Well, I saw this level and it looked like the market had gone too far and if it was going to stop this was the place.  It seemed like there was a Table Spoon chart pattern and because the handle broke the market was going to go up from this level.  I’ve seen this many times and it seems to always work.”

By now my head is spinning trying to follow this conversation.  But then I’m a left brain thinker (rule based and analytical). Traders who explain the reason for taking these types of trades are usually right brain thinkers (creative and pattern recognition types).

What is amazing is I have watched in total amazement as the market has turned right where they said it would.  From watching the markets over a period of time their right brains have seen and stored in memory some fabulous patterns.  And just like when we watch a movie several times and remember an upcoming scene, their right brain is seeing these patterns and saying, “Let’s go, we have seen this happen hundreds of times! Here is a trade!”

Some might say these right brain traders are using emotions to make their decisions, I would disagree.  The right brain can see patterns from your subconscious mind and then point them out much faster than any conscious thought you may have.

The problem arises when the right brain wants to place a trade because it sees a pattern that it has seen multiple times while the left brain is saying, “Whoa cowboy, show me some rules here or we are not going to do anything.”  This is where paralysis of analysis comes from.  You want to place the trade but something is stopping you, your left brain.

Imagine what a computer would do if you fed it input like the trader above trying to explain their reason for taking a trade.  Garbage in, garbage out is how they say it in the computer world.  The computer can only read digital zeros and ones, no gray areas.  Think of your left side of the brain as a computer that needs very precise rules to allow it to take action.

This is a real struggle for traders who are new to rule based trading.  They have been accustomed to doing things in life on the fly or winging it.  Being able to explain your reason for taking a trade is just as important as seeing the setup itself.

To be a complete trader, we must train our left and right brains to work together.  When a trader sees a setup and can logically explain the rules applied to that trade to somebody else they’ve engaged both brains and are on their way to becoming a successful trader.

Using the right brain to find these setups is fine to do.  But now the work begins of writing rules (trading plan) for what you’re seeing and why you want to take action.  Once these rules are written and you can actually explain them to another trader the left brain will allow trades to be executed without any hesitations.

Free Trading WorkshopThe next time you are talking to your trading buddies about a trade you took and they look at you like you have three heads, keep in mind that your left brain will need an even better explanation.

Without this right and left brain balance traders may find themselves hesitating to take a trade or worse, chasing the price when it starts to leave their zone.

Trading plans are the map to success when it comes to trading.  Without one you’re nothing more than a sailboat in a bay with a broken mast that wants to get to shore, you just drift at the mercy of the waters.

“Here is the test to find whether your mission on earth is finished: if you’re alive, it isn’t.” Richard Bach

Don Dawson

DISCLAIMER 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.

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