Trading rule number 8: don't stick to conventional trading rules

4 11 2016 - Pas de Commentaire, soyez le premier

It may seem strange to have a trading rule which says that we should not follow the rules. And yet, I think that there are "conventional" trading rules which are commonly accepted, never questioned, applied by the vast majority of traders, and which can be harmful to our results.

It is helpful to remember that over 90 per cent of traders lose money in the short and medium term. If you take out beginner traders, who place bets (gamble) rather than trade, by badly managing their leverage and their emotions, there are still a large majority of experienced, seasoned traders who do not manage to produce regular gains over time. And yet, these are often encyclopaedias of trading, they mastered all the theories, all the indicators, they have read hundreds of books on trading, etc. They dominate the subject perfectly and theoretically, they could give courses, but regular earnings are not there.

In fact, trading is much more than an accumulation of knowledge, which is of course essential for traders. However, in this case, too much knowledge kills knowledge. It becomes harmful, it blurs your vision of the markets. It leads to confusion, because when one indicator to enter the market contradicts another, one says that you should sell and take profits because the financial markets are overexcited, another shows that there is still room for bullish movement and finally, charting analysis predicts a market collapse. You're on your own with all this.

It is for these reasons that I strongly advocate that each trader establishes his own rules and abides by them (gains and regularity only come with the rigid application of these rules). The key to success in trading is custom-made. All traders who earn their living by trading their own accounts all have this particularity: they think for themselves, they do not apply a "miracle" method, they have adapted their way of trading, to who they are, to their psychological aptitudes, to their capital, etc. "Conventional" trading rules or methods are ready-to-wear, average methodologies that can apply to an average trader with average capital and a typical psychology. We are worth better than ready-to-wear, ready-to-think, ready-to-trade.

You should take losses and let gains run

Some rules such as "you should take losses" have meaning and save your capital from ruin, but I suggest, as an example, questioning the continuation of this conventional trading rule: "let gains run".

I applied this rule for years and I lost money on the financial markets for years... because it doesn't apply to me at all. After more than 10 years of very regular losses, I decided to take a big-bang approach to my trading method and to throw it all out completely, everything that I had learned to do was of no use to me since I could not make regular gains. Therefore I removed all the indicators that I had in front of my eyes, my trading charts looked like the dashboard of a Boeing, and after having analysed the tens of thousands of trades that I had made in recent years (a mammoth task which lasted 6 months), I discovered something which I had never seen with such clarity: 90% of my losing trades had been gains at some time. For me, the "let gains run" turned into immense losses. On the strength of these findings, I devised a new rule: "you should take your losses and take your gains quickly"; and tested it for a few months.  My new goal was therefore the following: as soon as my position had gained, I was ready to close even with a modest gain. The idea was that I should no longer turn a possible gain into an actual loss. A bird in the hand is worth two in the bush.

break the rules

break the rules

You should take your losses and take your gains quickly

By modifying this conventional trading rule, I have developed a very particular style of scalping that I call micro-scalping. I scalp to earn on average between 1 and 2 points. Like this I can trade 10 to 50 orders a day with a considerable degree of success. I now take my gains extremely quickly and this accumulation of micro-gains give the right results at the end of the month with minimum risk.

In hindsight, when a position was gaining and it reverted into the red, I psychologically had more difficulty to cash in my loss. I think this was because, subconsciously, I thought it was "unfair" and I focused on the idea that I was going to catch up. And my loss increased. For 10 years I had lost money on positions which at some time had been positive. I had to repeat this sentence hundreds of times to convince myself, because it was the opposite of the conventional rule: "let gains run". A rule that I tried to follow in vain, and it cost me dearly. By closing these positions on even a small gain, I would have been able to save tens of thousands of euros, which turned into losses.

With this new trading rule that I tailor-made to compensate for my psychological weakness (namely: not being able to cash in a loss quickly when the position had been positive at a certain time), I do of course suffer from another type of frustration: I gain +2 points, as soon as it falls back to +1 point I cash it in, and sometimes a few minutes later the position would have gained me +20 points. But I manage to bear this frustration well, because I know that this method enables me to earn money with extreme regularity and my psychology enables me to support this type of frustration easily. The cashed in gains reassure me.

Of course, my intention is not for you to adopt the same trading rules as me, that would have no meaning because you are not me: each person is unique so you need to find your own rules. You came to trading as an original. Make sure you do not end up as a copy, because it will kill you. This means that you need to forge your own rules, your own tools. But perhaps you must also sweep aside the certainties that have been the mainstay of your trading for years, in order to be more effective? At the end of the day, regardless of the manner, the verdict on the financial market, has no appeal: with trading you make money... or you lose money.

List of my personal trading rules:

1) Trading rule number 1: do not lose money

2) Trading rule number 2: reread rule number 1

3) Trading rule number 3: always have a backup plan

4) Trading rule number 4: only trade when you are on top form

5) Trading rule number 5: think for yourself

6) Trading rule number 6: check your losses

7) Trading rule number 7: don’t force yourself to trade

8) Trading rule number 8: don’t stick to conventional trading rules

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