The Importance of Rules in Trading

Last weekend I met Adrienne Toghraie at the Forex Trading Expo in Las Vegas. Adrienne is an internationally recognized Trader's Coach, focusing on emotional control and discipline. As Adrienne says: "You cannot trade a proven system without discipine".

In her latest newsletter Adrienne talks about the importance of rules in trading. Here's what she says:

Although many traders stumble along without rules, anyone who succeeds at trading has them. Rules are the foundation of self-discipline and self-discipline is the real Holy Grail of trading. Some of the best traders would argue that they trade by the seat of their pants and earn a very good living doing it. Yet, if you were to sit these people down and ask them what criteria they have for entering and exiting a trade, they would eventually come up with their answers and those answers are their rules.

The word "system" has become a dirty word in many traders' vocabularies. This is especially true in institutions where they ask, "Why should I pay a trader to follow a system when I can have a computer do it? I pay a trader to think on his feet and make decisions based upon what is going on in the market at the time." But whether you call it a system, a methodology, or a set of criteria for entering or exiting a trade, the bottom line is that you are creating rules.

Some traders resist the word "rules" and resist following rules. Often this occurs because these traders have had a bad experience in their past with parents or authority figures who were either too strict or too lax enforcing rules. As a result, they work their way around the word "rules" in order to be able to trade. Instead, they talk about criteria and methodologies, but however they camouflage the name; they find they must have a plan. Those who succeed, ultimately, have a plan and those who do not will sabotage their efforts until they are out of the game.

The main argument against trading rules is that successful traders enter or exit a trade from their gut or intuitive feelings. However, gut feeling is based upon a set of rules that has not been set down in writing, but is understood on an unconscious level that directs action.

Another argument that is used is that traders will have one set of criteria that they follow under some circumstances and an entirely different set of criteria under another set of circumstances. Then they go on and on about the contingencies that are involved. What they are talking about, however, is sub-rules to their main rules. If you know what your contingencies or sub-rules are, you are prepared to take the right action, even on those days when you feel frazzled.

Even if you have unwritten, instinctive guidelines, it is important to know what your rules are. When you have an off day, you can refer back to your rules and know where you have gotten off course. The rules that you need to establish are your criteria for entering the trade, for staying in the trade, for exiting the trade, for money management, and for modifying or changing your rules on a periodic review. The more ways you put your rules into your senses through sight, sound, touch, smell, and taste, the fewer discipline problems you will have. These are the steps to develop a deep understanding of your rules.

Write them down
Know that you know them
Hear the rules in your head or read them aloud so that if any conflicts come out, they will be obvious to you.
Feel that the overall picture makes sense

Conclusion:

In trading, resistance to rules is futile. Rules are the backbone of trading, regardless of whether they are codified or not. However, it is better to write them down, understand them on a sensory level, and submit to the discipline of following them than to be put out of the game and into the penalty box.

If you haven't subscribed to Adrienne's newsletter yet, you should visit her website right now and sign up: http://www.tradingontarget.com.

And mark your calendars: On October 14th Adrienne will conduct a webinar "Evolution of a Master Trader". For more information follow this link: http://www.rockwelltrading.com/webinar/evolution-of-a-master-trader-by-adrienne-toghraie

See you in the webinar!

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