Friday, April 17, 2015

Follow your rules!

Today has been an interesting day in the markets, with a quick drop in the indices. The supposed reasons or catalyst for the drop is irrelevant – all that matters is the price action on what you are looking to trade, or what has happened to those positions you already held.

On days like this, the chances increase that anybody who is risking too much on each trade, or cumulatively, will get frightened out of their positions – more often than not, at the extreme low of the day. If your stomach starts churning too much, then that is a clear indicator that your risk control is not up to scratch.

The problems start when someone does this, and gets out before price went against them even further. They will no doubt think they are smart. What they have done is override their rules. This creates a dangerous precedent.

You may be able to do this successfully once in a while, but over the long haul sticking to your rules will benefit you, both psychologically and in performance terms.

"I still go through periods of thinking I can outperform my own system, but such excursions are often self-correcting through the process of losing money." - Ed Seykota, from his Market Wizards interview

What is the point in creating a set of trading rules (when to enter, when to exit etc), created when you were thinking rationally and objectively, if at the first sign of trouble or market volatility you ignore those rules? Why bother going through all that process in the first place? You will only know if those rules stand up and deliver the expected results if you follow them.

Of course, if you are attempting to follow a set of rules which you didn’t create, or are not 100% comfortable with, then this is part of the learning process.

"Systems don't need to be changed. The trick is for a trader to develop a system with which he is compatible." - Ed Seykota

One position I am currently holding got hit a bit today, but price has dropped to where it was earlier in the week, and it has been in a strong uptrend for a while. All I have done with that trade is update my stop placement (per my trading rules), and switch off my charts, and let the market do its thing.

There’s nothing else I can do, or I can control, so why fret over every tick in the market?

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