Why Trading Rules and Process Should Be Your Focus

Posted in: Trading Article

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Everybody wants to win and be right.

The desire to win is so strong with many people that they will ignore conflicting information  so they “can’t” be wrong – meaning they win.

In trading, a win equals an increase in your trading account and a string of losing trades can eventually drain your capital.

It stands to reason that:

  • Wanting to win
  • Not losing money
  • Being right

is where the focus should be on any venture you decide to enter.  Given the myriad of issues losing can cause to your psyche, these three things are not where you should focus.

The problem is that all those things will never be a consistent reality so there must be a better place to put your focus.

 

Losing Trades Are A Fact Of Trading Life

Everybody that enters the world of trading must do so understanding the reality that losing trades do happen, and they can happen with many in a row.

We’ve seen many people who seem to understand this fact of trading life but after taking a few losing trades in a row, abandon the trading strategy they are using.  It doesn’t matter to them that over time, the trading strategy has a positive expectancy.

Over time, the strategy will make money.

But these traders will have abandoned the strategy just before the winning streak comes that would have boosted their account to new equity highs.

These traders have entered the trading business with thoughts of an equity curve that looks like this:

focus on trading process rules
UNREALISTIC EQUITY CURVE

You know what is even worse?

People not accepting that they can not control the outcome of a trade.

When people ask “what are trading rules”, a good explanation is that trading rules are the only things we can control in trading.  The only control we really have in trading is:

  • If we take a trade
  • Position sizing taking into account risk protocols
  • How we manage the trade
  • If and when we push the exit button

Once you’ve determined a trading opportunity that suits your strategy, you put the trade on and let the market do the work.  You trust that your trading system and rules will help you limit risk and perhaps bank a winning trade.

 

Winning Trades – Losing Trades – Random Distribution

Imagine that we know we have a trading strategy like the Keltner Channel trading strategy that wins 60% of the time as an example.  What we don’t know is what order the wins and losses will come but we know we have a 40% chance of having a losing trade.

  • There is a 100% chance we will have 4 losing trades in a row
  • We will average 5 losing trades in a row
  • There is a 10% chance of losing 7 in a row
  • There is a 1% chances of having 9-10 losing trades in a row
  • There is the possibility of having 14 losers in a row

This should make it clear that you will have losing trades, you will have several losers in a row, and that you do not know when the losing trades will come.

It makes no sense to focus on the results because other than not taking a trade, you have no control if they trade will be a winner or not.

 

It’s The Trading Process That Deserves Your Focus

Why are trading rules important?  The only thing you can control is something that you can actually do – follow the trading plan.

For every trade you take and any trading strategy you use, you must have a trading plan that lays out the rules of your approach to the market including:

  • What determines a trading opportunity
  • How much of your trading account will you risk on each opportunity
  • What will be your actual trade entry and exit condition

From crude oil trading to Forex and Bitcoin, you must have a plan of attack, a process you follow, for each and every trade you take.

I am assuming that you have back tested your trading strategy and that over time, it is expected to be a winning strategy and you have designed trading rules to follow.  What this means is that you have taken each aspect of your strategy – the rules you will follow – and proven to yourself that while losing trades will happen, your equity curve will have a positive slope.

Does it make any sense to deviate from the plan?  No.  But traders do.

If you are focused on the process of trading (and you should be), to deviate from your plan is a failure regardless of the result.  Why is a win a failure?

  • Wining and losing = Result focus
  • Following or disobeying your rules = Process focus

Remember, we know that with a 60% win rate, we should win about 60 trades out of every 100 we take.  That means there are 40 losing trades ready to pounce and you don’t know when they will.

Because you can not control when the losing trades will come, it makes better sense to focus on what you can control – the process you follow.

 

 

 

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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