Lessons from the Pros

Specialty Skills

Rules Hold the Keys to Trading Success

“Success is not final, failure is not fatal: it is the courage to continue that counts.” – Winston Churchill.

Part of the definition of “rule” is that it is a “governing action” or “procedure.” When you consider governing action, it really encapsulates the way that rules-based trading relates to results-oriented trading. This is because rules are essential to the trading process. Actually, if you are trading either without rules, or if you are not following the rules that you have established then you are you will eventually lose. Trading rules can be said to govern because they represent the procedures and parameters of your thoughts, emotions, behaviors, strategies, setups, entries, stops, money management, trade management, and exits.  In this way well thought out rules make the difference between being successful and blowing up your account.

Now, the other thing to consider as we discuss rules is that humans live by the stories that they have constructed from early in life much like a script to a play. These stories or scripts can be termed rules as well. They form the foundation of your behavior. In fact, as humans grow, they develop a set of typical response patterns to reoccurring events. These typical responses or patterns of behavior could be termed a list of rules that you live by. For example, if you incur a debt, you are expected to pay it back. 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 your every decision. These rules or life stories also involve the lessons learned from the earliest years, and those lessons have created the lenses through which the world is seen and judged – rules about money, privilege, power, worthiness, winning, and losing. So, not only are rules essential to trading, it is also important to have rules that are in your best interest.

For the most part, core, belief connected rules are out of your awareness. You make important choices based upon these life rules and when you get results that you don’t want, changing those results can be very difficult if you’re not also changing the rules that those results were based upon. In other words, if your choices go unchallenged then the awareness of why you made the choice remain out of conscious touch. However, once the rule is identified, it can be challenged and modified. Also, as you challenge each rule you uncover other assumptions that were based upon that rule to be myth rather than truth. The interesting thing about mythology is that if you believe it to be real, it is not mythology, it is truth to you, even as it doesn’t serve you. Consider this example: 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 if at every turn of the price action you are looking to impulsively enter then there is a distinct susceptibility to the disadvantage of over-trading. In fact, this simple yet powerful “myth” can cause your downfall in trading even though it can serve you in other parts of your life. This ineffective rule leads to behavior that is not your A-Game. It can be termed a “Fool’s Rule.”

Other “Fools Rules” or trading myths:

  • Trade at least 50 positions a day to make a ton of cash
  • Do not use stop losses
  • Try to use economic news releases as trend indicators
  • Keep all of your losing trades open and add to your losing positions until the market comes back and get out at break even or small profits
  • Only try to catch market tops and bottoms and do not trade in the middle of a trend
  • Trade just before the news to make hundreds of points in a couple of seconds
  • On a price action pattern, jump in early to make the most profit
  • Make sure your position size is big in order to make big money

So, it’s important to ensure that your rules support your A-Game, your highest and best trader while in the markets. That’s why you’ll want to have a list of rules that are geared toward your Internal Data (thoughts, emotions, and behaviors that underlie your trade) as well as your Mechanical Data (setups, price action, indicators, news, economic reports, etc.). In other words, you want to support your trading mind-set and emotional stability in order to focus with laser precision on what-matters-most in the trade. Below are a number of rules that are designed to support your Internal Data

  • Move: Flexibility is the key (both literally and figuratively) Learn to change if necessary. If you always do what you’ve always done, you’ll always get what you’ve always gotten. And, if you always think what you’ve always thought, you’ll always do what you’ve always done.
  • Learn to exit when necessary:  If you find that you are violating a rule, exit the trade…even if you are making a profit. If you stay in you are only reinforcing bad behavior. Especially if you are making a profit.
  • Hope is a 4 letter word: Refuse to take that trader drug “hopium.” It means that you’re putting your hard earned money up to pure chance.
  • Know your risks: Always calculate your risk to reward ratio and stick to the parameters. This is the way you can have a 33% hit rate and still be profitable.
  • Be accountable for your performance: Set goals and document your thoughts and emotions (Internal Data) and as well your Mechanical Data (the mechanics of the trade). You are responsible for your own decisions. Own your mistakes.
  • Mind-Set: Learn to manage your negative emotions and harness your positive emotions (ex. Determination, inspiration, passion, joy, etc.) and understand the emotions of those around you. Always remember what General Patton said: “If everyone is thinking the same then someone isn’t thinking.” Also the famous Buffett quote: “Be fearful when others are greedy and greedy when others are fearful.”
  • Your Tribe (the what-matters-most in your life): There is more to life than trading and investing. Don’t live to trade. Trade to live. Being the richest man or woman in the graveyard does nothing for your quality of life.
  • Remain Consistent:  Do not adjust a strategy, a rule or principle in order to conform to the market. Instead, let the market conform to your strategy. Have a target, set a rule, let a particular part of the market conform to this rule, follow the rule without deviating. “If you stand for nothing, you’ll fall for anything.” Alex Hamilton

Remember, your A-Game and trading from your highest and best self is all that matters to your trading results. The trading trenches are not a place to venture into unprepared and unfocused. Trading is a 90 – 95% mental game and if you don’t have mental and emotional tools it is like driving without a steering wheel – you’ll crash and burn without it. So, let your rules be the keys to your trading vehicle that has everything you need…especially the steering wheel to drive consistent trading results. Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”

Happy Trading.

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.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.