Five ways to stop you breaking trading rules

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http://globalgrowthinvestor.com/117/five-ways-to-stop-you-from-breaking-trading-rules/

Five ways to stop you breaking trading rules

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Ugly at uglychart.com is struggling with sticking to his trading rules and has set up a support group. Here are five ways I stick to my system and keep myself on track.

These methods are based on the fact that successful trading is probably unnatural for us emotional and greedy human beings. So we have to put in structures and methods to counter our natural instincts.

1. Checklists

Filling out a simple checklist manually before you place a trade is effective because it says: STOP, is this rational or irrational?

A checklist might be as simple as:
a) Trade in direction of major trend? Yes/No
b) Trade in direction of general market trend? Yes/No
c) Risking 2% of capital? Yes/No
d) Risk/Reward ratio is 1:3? Yes/No

The more specific the checklist the better, and obviously it should capture the essence of your edge and be as simple as possible.

I put every trade I make through a checklist of fundamental, technical and market criteria. It’s not fool-proof but it does make me stop and think, and look at opportunities more rationally.

2. Know your edge

Sticking to your rules can be tough if deep down you don’t trust in your system. Or even worse, you think there’s something better out there! I suspect this happens a lot with traders who use other people’s methods and don’t modify them to suit themselves.

My system dictates that trades are placed with the goal of holding until the trend ends. That could be anything from a few days to a few months, or even more than a year. This is the best system for my personality, lifestyle and the objective of building up my capital.

But for a long time I thought that I should be ‘swing trading’: taking a lot of short-term trades to nail all these opportunities saw. Unfortunately, I would only swing trade when my account had big gains - feeling confident, I would try and squeeze out some more profits with a few short-term trades. Invariably this would mark the end of the market’s upswing. So my normal healthy drawdown was made worse by losses on swing trades.

To curb this habit of trying for some quick and easy profits, I now keep meticulous records of my trades, including Excel spreadsheets and a paste book of charts of every trade I make. By reviewing these records I have ingrained in myself that I only make money by sticking to my system.

3. Keep money in perspective

I’ve found I break rules when I am subconsciously thinking that I badly need money for something. For example, if you have a wedding coming up (as I do) that requires a big outlay of cash, subconsciously you’re thinking ‘I need to nail some big trades to pay for it.’ In that scenario you’re more likely to be trying to push trades that you normally wouldn’t have considered.

I assume this is exacerbated if you need to make a living from trading. Every trade is linked to paying your bills which is an enormous pressure to bear.

The key is to closely monitor your financial position and be aware of pressures that you may be under. Keeping a journal, or speaking frankly to your partner or a friend can help you deal with this.

4. Tell someone

One of the ways I tried to overcome my ‘swing trading’ issue was by making a rule that I had confess to my girlfriend (now fiancée) every time I had an urge to make a trade that didn’t fit my system.

On one occasion I can recall having an internal battle about whether to tell her or not. I could literally see the profits in my pocket from a potential swing trade. ‘I’ll be in and out and no one will ever know’ I thought. In the end I confessed and let the trade pass. As it turned out it wasn’t an opportunity and it would have left a serious dent in my account.
5. Don’t be too hard on yourself

We’re all human and we all make mistakes. If you read good trading blogs and research successful investors, their experiences are a litany of missed opportunities and mistakes. The common factor is persistence, and once they become successful they do everything they can not to blow up. But perfection is an unattainable goal.