Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
I didn't say "no rules". Instead, I merely conveyed my experience that specific rules can be counter productive. Certainly, if the rule works then use it.
A good example is let's say a trader is over trading, a rule specifying a limit to the number of trades will only be appropriate for a given level of volatility. Also, it might prevent the trader from discovering new edge/trades. On the other hand, a principle or goal of "Focus on taking the highest probability trades and/or best risk/reward trades" doesn't specify an artificial restriction. The rule sets up the false/wrong objective. All things equal it is going to be better if more trades are taken if they are of good quality because more trades means more profit opportunity. What one does not want to do is take many mediocre or poor trades.
Another example, a trader is only profitable during the morning session. A rule might state "Stop trading after the morning session". This makes it sound like a "goal" to only trade the morning session. This is not a good goal though if the trader can develop setups that work at other times. The principle, "Only trade during times when I have an edge or do well" changes the focus toward what is important.
The point is there is always a goal behind any rule and that's where the focus should be.
Can you help answer these questions from other members on NexusFi?
Sorry if I mischaracterized what you wrote. When you say 'for a discretionary trader, I find that rules often will not work well', I would argue, the rules are there for a reason, even in a discretionary capacity. For example, one could limit the number of live trades while staying in front of the screen and SIM trading with a view to discover a new edge.
I believe rules still have their place even for discretionary traders. Another example of something simple but effective like "3 losing trades in a row and I'm out for the rest of the day" comes to mind, especially when a trader is developing and is not 100% sure of market state.
If I understand the point you want to make, it's about principles Vs. rules, and my take is adopting the one or the other probably depends on the trader's development stage.
There's a book called "The Leader's Window" which talks about different management styles and, according to the development stage of the employee you are managing, suggests what style (in fact, what different mix of styles) is best suited for the occasion.
I suspect a similar paradigm can be applied here: rules are simpler to follow for a beginner and artificial restrictions could in fact be better. During their development, however, they could relax the rules in favour of a more principle-based approach.
I'd argue lack of absolute rules can be a big problem for discretionary traders, in particular due to numerous cognitive biases such as "Optimism bias", "Pseudocertainty effect", "Restraint bias" and "Zero-risk bias".
This is not to argue that the (As of yet) unrivaled pattern recognition of the human mind can't be effectively exploited for trading a discretionary strategy profitably, but that its limitations should be noted and addressed.
I actually think a software solution would be very useful in certain contexts provided the trader understands how to adapt the rules based on the developing information. Criteria to consider might include the following,
1. Problems, Goals, and Rules
A problem is something that we identify in our trading that we want to improve. But, how do we do that? The question is it better to focus on goals or rules. Goals suggest we need to work to improve the problem but don't specify precisely how to do it. Rules imply that we know how to correct the problem which is often not the case.
Let's take a problem like over trading. If we identify the problem as trading too much then the goal might be to trade less. But, that might not be the correct goal even though the eventual solution might be to trade less. A good example is I practiced poker to see what it might teach me about trading. I did not play well in full-table games. I traded too many hands and the game was too slow. So, the problem if you look at simplistically was lack of patience or discipline or poor impulse etc. Psychological studies suggest that gambling might be more likely with faster play. So, you certainly wouldn't want to play faster games based on that rational. But, I found just opposite, when I played turbo games I could play far better because of the faster play. I was able to get "read" on the other players like in trading in the fast games. Because the cards came faster and there were less players, I could see more plays, play more selectively and still play the same frequency.
So, let us consider over trading, something I'm working on now, and think about it in more ways then simply a matter of trade frequency,
A. Over trading could really be an under trading problem. That is under trading enough markets and strategies to find enough setups.
B. Over trading could be a trade selectivity problem. The goal would be to boost profit factor. Selectivity can be viewed in dynamic or static context but probably viewing dynamically is more useful.
C. Over trading could be viewed as a trading cost problem. The proper solution might be then to reduce costs or to limit your trading costs in proportion to your gross profits.
D. Over trading might be a result of trading the wrong or too slow markets.
2. Rules need to be dynamic/adaptive or based on ratios to account for changing market conditions. A good example would trade frequency which is going to be very dependent on the volatility. So, setting a goal of X number of trades might be correct on average but might be wrong on the days where you could make the most money. One way to define it would be, take the profit factor model, and then you want to limit your trade costs to some proportion of your gross profits. Rules designed for application might suggest If gross profit > $X then stop trading if trading costs exceed X% of gross profit.
3. Rules need to be predictive. If any rule worked 100% of time then keep in mind you could just take reverse of your trading and make even more.
4. Restricting one aspect of trading typically requires allowing for more variation in another. An example might be if you restrict your trading frequency then you need to allow for more risk per trade, win ratio, etc. If you restrict your daily loss then you need to be able to vary your leverage (this may not be possible in futures below certain amount!). Another example might be varying your size by trade confidence. The result will be greater variance, a greater change in std dev. of average trade. There is always a cost. So, if you are thinking about a rule then it might be useful to think about what you are going to allow to vary to a greater degree.
5. Keep in mind similar words may have different meaning in different context. It might be easier to make a significant profit with some consistency then to make a moderate profit consistently.
6. And as an obvious counter-point, the making up of rules might be viewed as a psychological bias itself, example of illusion of control, unless those rules are shown to improve results or are crafted to allow for proper variances.
This is something I struggled with mightily over the past couple years.
I'd set a rule then find myself getting trapped out of a trade. This happened with the Trump short vol trade of 2016/2017. I was in the trade according to signal, got out again according to signal, then could not find the setup to get back in. And sat on the sidelines gnawing on my own body parts for months.
Needless to say I have had to modify, throw out some rules.
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
I think there are a lot of rules-based discretionary traders.
Your setup(s) are a description of a set of events described by your rules. Often these don't lend to automation.
Yet even with a set of rules (often complex) you still have the element of experience. You can look at a setup that is conforming to the rule set describing it and still say "no it doesn't feel right".
There is so much complexity in the market (and so much manipulation) that rules become more of guidelines to help you stay out of trouble.
If they could program everything they would not hire hedge fund traders.
@Tickworks I have revised some of my thinking on this matter. I do think there is use in some programmed risk limits. I think benefit is mostly for discretionary traders who are trading more frequently. I do now see a case for programmed daily loss limit, automatic cancel/flat all at EOD, and position risk limit would be useful. I do not think it conflicts with my prior reasoning because these sorts of rules are invariant anyway.
Hi tgiann3 (I dont know yor name, please may I know it?) Mine is Juan Carlos ;-)
tgiann3, your rules were really pretty good to me and I think there are some other newcomer traders out there could take very good advantage of your rules, if they were in Spanish. Would you mind if I translate them to Spanish and publish them, and of course, I will say you are the source. PLease tell me about.
Thanks....
The biggest problem most traders have is not following their own rules.
If you have a well thought out plan and the discipline to follow it you'll never blow up your account.
By following your plan you will determine if you have an exploitable edge. If you don't follow the plan you will never know if the problem is the plan or the trader.
"The days when I keep my gratitude higher than my expectations, I have really good days" RW Hubbard
