You might have been told that in trading you have to do your own thing and find your own path. However, this could be a problem especially when starting out because how do you find your own path? This post attempts to address this conundrum.
It starts with some rules
We can find our own way by setting up some rules and following them. Like deciding what we will do and how we will behave in the markets – and actually behaving that way. Think of trading as an experiment. The rules you create are the hypothesis you will test against.
These rules don’t need to be original or perfect. You can borrow them from other people or books, or simply tap into your own intuition. It doesn’t matter. But you do need to be consistent in following and applying the rules you’ve selected.
You can change and/or refine them from time to time. However, you need to be careful here. A losing streak is NOT a good enough reason to be changing rules.
Also, don’t make changes too quickly or frequently, but only after careful study and analysis of the effect the various rules have when tested out in reality. This includes your emotional and psychological response to certain situations in the market.
Quick and frequent rule changes are akin to chopping and changing your thesis as you’re collecting data.
Having rules also protect you from random behaviour. As Mark Douglas points out in his book ‘Trading in the Zone’, “…random inconsistent behaviour produces random inconsistent outcomes.”
You have to act in a consistent manner in the face of random market outcomes. The rules you choose to follow will help you with that.
Good rule characteristics:
- Clear identification of entries and exits. You need to know when to enter or exit the market.
- Capital preservation. You can’t win if don’t have chips to bet with.
- Positive expectancy. Ensure the sum of your winners is larger than the sum of losses in a large enough sample set.
- Your rules need to be in line with your personality.
If you’ve identified a method or set of rules you can follow with discipline, but that is flexible enough to bend or change slightly as you learn new things, you’re on your way to finding a winning game plan.
Like an artist, even the most naturally gifted ones, first learn and paint within certain rules and explore more of their creativity as they get more and more competent in the arts. So it is in trading
Traders share a peculiar characteristic: they’re fiercely competitive, but only with themselves. In practice this means that they see every outcome as an opportunity to learn, and they’re brutally honest about both their failures and successes. This also means that they’re hungry for knowledge. They don’t sleep easy with unanswered questions. And they’re seldom satisfied with just one answer.
Find him on Twitter: @njabulo_goje.