Updated from its original posting on 19-02-2010
If you were to ask a group of profitable traders what the secret to their success is, chances are that you’ll hear the word “consistency” more than once. Of course, achieving consistency is easier said than done. But by creating a process and setting trading rules for yourself, you can achieve consistency in your execution, which is the first step to becoming a consistently profitable trader.
Contrary to what rebels may have you believe, rules are not always meant to be broken, and the less experience you have the more this rings true. Instead, they are there to help turn positive trading behavior, or what works for you, into acquired habits.
For illustrative purposes, let’s take the case of Ralph, a trader with no particular set of rules. Not having a set of guidelines to guide him often leaves Ralph at the mercy of his emotions, which tend to lead him away from making good decisions. Because of his lack of rules, he often finds himself wasting precious time and energy thinking about what he should do, instead of automatically doing the right thing. His focus is taken away from the markets because he’s too busy thinking of what to do. As a result, he isn’t very in tune with market behavior.
Setting rules–and more importantly, following those rules–is so important. It breeds consistency. By having rules, you can train yourself over time to recognize and have automatic responses to certain situations. By training yourself to react automatically, you will find more consistency in your trading because you no longer need to spend a lot of time thinking. You just react.
It’ll take time and experience to develop rules that work for your trading personality, and you wanna know a little secret? The trick in making those rules work successfully is to “simply believe in them.” No need for magic spells or pixie dust.
What use is a set of rules if you don’t feel compelled to follow them? You’ve done your homework and you know they’ve led to more winners than losers, right? In order to stick with your rules, you have to remind yourself of the possible consequences of violating them. These can be based on your past experience or observations.
For instance, you can recall the time you set your stop too tight on a range-based trade and it ended up getting stopped out before the price moved in your favor. The next time you take a similar setup, you’ll feel the need to follow your stop-loss rule in hopes of avoiding another losing scenario.
Since the awareness of the possible consequences of violating those rules come from your OWN experience, it’d be more effective to come up with your OWN rules. What works for other traders won’t necessarily work for you. Besides, it makes much more sense to come up with rules that fit YOUR trading style and YOUR personality.
Now don’t think you’ll eventually come up with a set of rules that will get you a 100% win ratio. You can come up with plenty of rules for every imaginable aspect of your trading (such as entry triggers, position sizing, scaling in and out, etc.), but we can guarantee there will be days where the markets throw something no one was ready for.
Remember that human emotion is unpredictable and that the future is unforeseeable; there are no certainties in market behavior and this makes trading a game of probabilities. Having a set of rules, versus none at all, helps you frame the market to build your system and make good trading decisions in the face of that uncertainty. With time, deliberate practice, and experience, these rules will lead to a natural feel for the market, great trading habits, and consistent profitability.