To be successful in any life endeavor, it is necessary to have a set of guiding principles to abide by. This is true, whether it be as a business owner, or even in interpersonal relationships such as a marriage. Whether you call them rules or guidelines, life is about setting parameters and establishing boundaries that dictate what you will and won’t do.
This is no less true when it comes to trading; as every trader eventually learns that to have long-term success, a series of rules must be formulated. Many times, these rules are conscious and can be articulated in an outline; meanwhile, there are other traders who, through experience, have a set of subconscious rules that are just as pertinent for their success.
One of the persistent problems that I have found as a trader who has worked alongside many other traders is the challenge to stick to the rules. Trading involves the task of making quick decisions, and it requires a certain level of discipline to maintain a distinction between thinking fast and acting impulsively. You will know that quick thinking can often be the key to finding the winning trade for the day; meanwhile, impulsive tendencies are the difference-making in profit and loss.
Today we will look at a few ways that you can become a better rule-based trader, and equally important, develop the discipline to keep your rules. The intention is that your rules become so embedded within your trading DNA, that they are natural for you.
Write Down Your Rules
Sure, you may know all your rules in your mind. However, there are psychological benefits to writing down what you may have agreed to mentally. When intentions are written, or typed, they are automatically reinforced into your psyche. Furthermore, as you write down your trading guidelines, it helps you think about and develop further measures that will assist you. Lastly, having them written down will make it easier to refer back to. Believe it or not, I once knew a trader that kept his rules unwritten; eventually, his winning percentage on trades began to decline. As I consulted with him for hours; ultimately, he was able to recall that one of the rules he formulated for trade entry was no longer being implemented. This was not because he had consciously chosen to abandon it, but over time, had forgotten one of his rules. Write your rules down; it will benefit you later!
Keep A Trading Journal
This idea might seem lame, but in the long run, it may save you time and money. You don’t have to do this for every trade necessarily; however, it can be very beneficial, especially on your big winners or losers or during hot and cold streaks.
What is vital is that this journal records not only pertinent trade data such as instruments, time, and price but also the technical or fundamental reasons. Where the journal becomes vital, is when you add to the trading facts, certain psychological factors in your trading. For example, I know a trader who refused to trade on cloudy, rainy days because she asserted that she rarely was successful when the weather was grey. It seems odd; however, psychology informs us that there is some legitimacy to her observations.
As you keep your trading journal, you might note unusual weather factors or other events in life that could potentially serve as a distraction. For example, did the FedEx driver deliver a package, ring your doorbell and cause you to leave your desk for five minutes, and how might this have affected your trading? Other factors include relationship habits, are you used to being at home, trading alone, but on a particular day, your significant other was home from work, sick, and you had a losing day.
Once you synthesize the data from these journals, it leads to the following suggestion…
Keep Your Rules Fluid
Life teaches us that the older we become, and the more experience we have, the more we learn. As traders, we should have a self-awareness that develops. The more data we have, such as from a trade journal, the more we can adapt to our surroundings. For example, if you note that on nights you don’t sleep well that you tend to have more losing trades, then your rules should modify to accommodate this tendency. For example, you might create a rule that following sleepless nights, you don’t trade at all, or you trade in the most prime hour(s) only, or you trade with partial size. Again, this is where your journal will suggest to you the personal habits you need to comply with your tendencies.
The point is, the more you learn about yourself and your trading style, the more your rules should adapt to keep you safe.
Keep Your Rules Visible
This is a method that I developed from personal experience. For a long time, I was able to craft appropriate rules for my trading; however, my problem was in keeping my rules. Eventually, I developed an approach that worked for me, and others have given testimonies that it benefited them as well.
I have ten monitors at my trading desk, and what I have done is formulate a series of keywords that will remind me of each rule that I have incorporated. I have attached these keywords to various places on my monitors, to the extent that while I am watching charts, I am also in view of my rules at all times. Furthermore, the most pertinent rules that help me avoid my most prominent screw-ups are posted on the monitor where my order entries are kept.
What this does is keep me actively engaged with my rules the entire trading day. The goal is that with enough reinforcement, that these rules become natural to the trader, to the extent that nature becomes to keep the rules, and breaking the rules is contrary to your personality.
These are just four ways that you might become a better rule-based trader. I look forward to seeing your ideas posted in the comment section.