The Need for Trading Rules

Question:

Hi Lance,

I read from another resource that in order to detach your emotion in every trade you need to have a set of written specific rules about your entry, your position size, your exit and any other possibility that might happen in that trade and you need to follow it with “marine discipline” to make your success in trading business. What do you think about this statement? Do you also have specific and written trading rules?

Thanks and Regards

G

Answer:

Hi G,

I don’t know of any successful trader who does not have clearly defined and documented rules for all aspects of their trading. I certainly do, and consider it essential. And of course, it’s pointless having these rules if you don’t follow them. A successful trader does follow their rules.

Important points though:

  • You mention ‘marine discipline’ – a successful trader doesn’t follow their rules through application of willpower. They follow them because they have developed a complete confidence in their strategy, and in their own ability to act in their own best interest. This develops over time, through thorough testing first, and then through demonstration of success in the live trading arena, with small position sizing first, followed by a gradual increase of risk only when proven successful at each level, at all times with an emphasis on risk, money and business management, and a positive trading psychology.

  • Please note as well that having defined rules does not mean there can be no room for subjectivity or discretion within a trading plan. I have clearly defined rules, but I am still a discretionary trader.

  • You mention detaching yourself from your emotions. I’m glad you use that term. Most people who email this sort of question state that they wish to trade without emotion, which of course is not possible. You will always have emotion – you’re human. The key is learning to work with it, to minimize its influence on your trading decisions. This takes time and exposure to the markets, and a gradual improvement process as mentioned in the first point above.

  • You will make mistakes as you learn to trade your plan in a consistent manner – lots of them. Accept it. Enjoy the challenge. Just aim to improve a little each week. To do so, you’ll need to journal everything, and conduct a regular and thorough review.

After all, trading is a business. You need to treat it like one if you wish to play in the professional arena.

Hope that helps,

Lance Beggs

 


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