Lessons from the Pros

Specialty Skills

Trading Rules are the Compass to your Success

No doubt if you’ve been trading for any amount of time then you’ve heard from a number of sources about the critical importance of having and following rules.  Trading is a discipline that is fraught with many pitfalls; so we must identify and incorporate rules about preparing, analyzing, processing and executing in order to get the results that we want.  The road to getting desired results consistently involves not only following rules, but ensuring that the rules that we have chosen are appropriate.  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 rule based trading relates to results oriented trading.  Actually, if you are trading either without rules, or if you are not following the rules that you have established then you probably won’t be successful.  Trading rules 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.

Humans are guided by rules (stories, beliefs, and biases) that they have constructed from early in life.  These stories and beliefs 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 are like a compass pointing us in the direction of our goals.  These rules are reflected in your every decision.  They reflect the lessons learned, 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, they are also important to maintaining a focus on what’s in your best interest.

For the most part, core rules, i.e., beliefs and biases 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 “doubling down on a trade that has gone against him” because he also believes that it will always come back. This belief becomes truth in his mind and can cause considerable consternation and loss due to the inordinate increase in the risk he has in that trade.  This ineffective rule leads to behavior that is not your A-Game.

It’s crucial 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 manage your internal emotional state in order to focus with laser precision on what-matter-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.Compass

  • 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 Clan (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, trading from your highest and best self is all that matters to getting your desired 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 a nail in with your fist, it’s not only very painful, it will cause you a lot of damage as well.  So, let your rules be the compass to your trading… having the right tools to construct consistent trading results is the key.  This and many other important concepts to trading successfully is what we teach in the “Mastering the Mental Game” Online and On-location course at Online Trading Academy.  Ask your representative for more information.  Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”

Happy Trading,

Dr. Woody Johnson



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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