Consistent Trading Success Requires Following Rules

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An orderly, methodical process of trading is what defines putting yourself in a position to become a consistently successful trader and that necessitates the formulation of and commitment to a set of strong rules. This is one of the most difficult hurdles for traders to negotiate. Why is this you might ask? Well, it means that you must develop, if you don’t already have it, self-discipline; and it means that you must hold yourself accountable for “all” of your results.

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. 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 gambling. 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 overtrading. 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.

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 gambling and putting your hard earned money up to pure chance. Remember, there is a reason why Las Vegas is full of casino high rises. They don’t call it “Lost Wages” for nothing.

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, your A-Game and trading from your highest and best self is all that matters to 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 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,

Dr. Woody Johnson

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