Rules and Psychology

Thanks for tuning into another one of my blogs. This one is later on the day but still a wednesday despite a few things going on in real life. Today I want to discuss the way rules affect our psycholgy within trading and the pros and cons of very strict rules and more loose rules. This is from personal opinion and experience and might differ to you but I think you will find some similarities of your own.

Rules are an essential part of our trading and helps to add structure and consistency in our approach in order to exploit our edge. Some traders have more and more specific rules and some have very few and leave it to judgmenet in the markets. However they all have rules.

So what are the Pros and Cons of strict rules. Strict rules will allow for easier execution. If this, then that. If this, then that. If this, then that. If this then execute. This highly structured and strict process allows a step by step process for any trader out there to follow and makes it very systemised and easy to trade. It takes a lot of the emotion out of your trading as it is a clear right or wrong process. Ideallly you wouldn’t have any grey areas in there but if you do they would be very minimum. On of the main psychological advantags to this is when you lose you dont take the losses personally. What do I mean by that? When it is so rules based it feels like a system you just execute when everything needed aligns. When you lose, as any strategy will you can attribute that loss on the strategy rather than yourself because you know you did everything you were meant to do right. This is assuming no self sabotage of course.

However how does that change when your rules are loose and you allow yourself more freedom in the market. If you have a trending strategy for example you might win 40% of the time which you know from backtesting and/or live trading. However if you have the freedom to choose whether to take the setup and your rules aren’t forcing you, if you make the ‘wrong call’ in the short term, so a losing trade or missing a winner all of a sudden you begin to doubt yourself. Was it my analysis? Was I missing something? Why did I take it there? All these sort of questions pop up to your mind and you take it personally. This would be particularly dangerous in a drawdown where confidence is slightly lower and it might impact your decision whereas the rules will keep you in place.

The main disadvantage of strict rules is the ‘lack of analysis’. Maybe that is the wrong term but sometimes you get caught up so much in the system you might not neccesarily agree with what price and your analysis is telling you. You might get a selling signal meeting all rules meaning you need to sell but in reality dont think price will do what the system suggests it will.

Overall, from experience and hearing others talk about their approach I do suggest you begin with firm rules and keeping as much of your emotions out of it. As you grow as a trader and become more experienced you can begin easing off your rules or loosening them up. I DO NOT MEAN BREAK THEM. For example as mentioned before selling in a bullish bias you can even add an extra rule saying something along the lines of ‘If strong bullish bias, then I can not take a Sell signal.’ This is where a ‘Strong’ bullish bias becomes subjective butfrom experience you slightly begin to loosen up or become more aggressive. This is something I am in between doing now, finding the balance between a strict rules bsed system and freedom in the market because I personally feel these emotions on the set trades.

Hope you enjoyed this post and found some value which you can apply to your own trading plan and rules. End of the day it is about playing about trial and error and figuring out what suits YOU. Be sure to follow my Insagram for more insights, tips and analysis and let me know your thoughts on this.


Published by Lach Plays Trading

I'm a forex trader whos journey began January 2018 and has had its ups and downs but has taught me a lot about the markets and myself as a person. Documenting my journey and sharing my experiences for you to be able to learn from them and my prior mistakes. Fully transparent, not afraid to show losses or speak exactly what comes to my mind.

Leave a comment

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: