By Michael Brook
Source: StockCourse
One
of the curious things about trading is that it is a rule free place. There
aren’t any real rules as to how you interact with the ebb and flow of price on
a daily or minute by minute basis. There isn’t a policeman there to tell you
that you are speeding or going the wrong way. There aren’t any stop signs
telling you that you just about to drive into a highway on the wrong side when
all the traffic is heading in the opposite direction. The trading environment
is a rule free space.
There’s
a saying in german, “Wer hat der Wahl, auch hat der Qual”. Translated this
means that if you have the choice you have the burden of the choice and it’s
consequences.
In a
rule free space like trading you have to make a lot of choices repeatedly and
the burden of those choices are yours and yours alone. Every time you think
about a trade you are making a choice about that trade. Will you stay in or
will you get out… what about the last time this happened?, what’s going to
happen next? Etc, etc, etc…
In
such an environment, what is critical it to decrease the burden of the choices
you necessarily have to make by virtue of being in the rule free space we call
the market.
The
best way of doing this is to have a clear set or rules that you have for
yourself that you have worked out works for you. My style of trading will be
different to your style. My risk profile may be different to yours, my skill
level may be different, the instruments I like to trade may be different to the
ones you like to trade etc, etc, etc…
Before
you can trade successfully you need to make clear decisions about:
The
instruments and markets you trade in
The
timeframe you trade in
The
level of risk you are tolerant of.
The
amount of time you have to learn the skill.
The
intention you have for learning how to trade.
Each
of those choices will affect your decisions and future profitability and
success.
This
is akin to taking a learner driver and putting him behind the steering wheel a
formula one race car telling him it’s going to be fine you’ll get there really
fast. The predictable carnage is not easily explained away.
Traders
who able to make quick decisions can make better short term traders than others
who take longer to make decisions.
Once
you have decided the things above you will need to do everything you can to
reduce the amount of work that you will need to be doing in your decisions
making.
To
reduce the confusion factor you will need to have a trading plan that has
clarity. The more complex any system is the more things that can go wrong with
it. System theory holds that for a system that has “n” components there are “n
squared” possible failure modes of that system.
So
if you are building your trading system you want to make it as simple as you
can.
In
order to make your trading system simple you need to:
Have
it as simple as you can
Have
a precise market (context) for each trade
Have
a set of trades for each market.
Have
a set of simple entry and exit rules.
Have
a detailed review methodology
If
your trading is not working the probability is that either the decisions you
made before you started trading have not stood up to your interaction with the
market or the market is not favoring your trading system.
If
you trading system is not as simple as it needs to be or is dripping with
complexity the chances are that you aren’t getting the results you want out of
it. There is a reliable predictable path for most traders whose trading gets
initially more complex then substantially simpler with time.
Most
expert traders have systems that are simple to implement.
The
path to trading success is much like sharpening a knife. You have test it out
before you know if it’s sharp enough. This means sometimes you will get a cut
or too in the process.
The
saying that the simple things in life are often the best is true particularly
when it comes to trading systems.
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