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Successful Traders Stick To Their Rules


No one is smarter than the market. Do not impose your beliefs on the charts.


Cleaning out all positions and starting fresh is always a refreshing experience, as long as it is done with a plan of attack and not during an emotional swing.

It was around noon yesterday or thereabouts when the white towel of surrender was firmly in my hand and the arm was cocked and ready to throw. I was very close to hitting the eject button and throwing it in.

I had had it. I was sick and tired of fighting a tape that just wouldn't trend longer than a few minutes. I was churning more than Fabio as my trading was solid but there was simply no ground being made up and the only real winner was my broker. So here was my chance to clean it out and call it a day. Clearly there would be no holiday move, clearly the markets were garbage and with options expiration Friday, who needed it? My Energy Conversion (ENER) was reversing, CME Group (CME) wasn't going to break and Petrobras (PZE) wasn't going to take out highs. What was the point?

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Just as I was about to start selling, I did what I have forced myself to do on several occasions and read my rules that are firmly planted next to my keyboard. For as long as I can remember my Number One rule has always been 'Don't Fight the Tape' but just recently I moved this to Number Two, replacing it with 'You are not smarter than the Market. Do not impose your beliefs on the charts.'

After reading that rule, and becoming thoroughly annoyed that it would hinder me from hitting eject, I went through each position, one by one, to see where it was trading and if it was really cut worthy.

You guessed it. While most were trading lower, not a single one was on the chopping block. It was a very fascinating experience as my thought process immediately shifted and I once again realized that my stops would act as my guide and I should not let my emotions control my trading.

I took a deep breath and cut nothing. Ironically, I then made a decision to buy a rather big chunk of the S&P 500 (SPY). I felt that if I was so close to a 'sell all,' others would be too and it was a gut feel that if that was the case, odds favored a bounce. Of course, I picked the wrong ETF, but that is a different story. The bottom line is that yesterday my rules saved me a great deal of money. Just when my emotions were taking over and I had had enough, I removed emotion from the equation, followed rules that were written at a time when emotions were not present, and rather than trust my own personal judgment, decided to fall back on guidelines I have put in place over years of trading. Phew, that was a close one.

It is only natural for a stock enthusiast to study traders. It is similar to someone who loves golf and studies Tiger Woods. In my studies I have often found something that is rather interesting and maybe different than most would suspect. The most successful traders I have studied don't rely on gut calls or feels, but rather adhere to a disciplined set of rules or guidelines and are humbled enough to admit that their emotional decisions aren't consistent enough to hold up during the heat of the moment.

Ironically, most would think just the opposite that the more successful a trader is, the more 'feel' he or she has or the more 'instinct.' Sure, it looks macho to make calls or predictions and when proven correct a person is often praised and viewed as having some superior knowledge, but in reality these people are one step below those that have already moved through this stage and left it behind.

As an individual trader it is simply impossible to remain emotionless, making the proper trading decisions at all times, when the action is heated. Even when there is a lull, our emotions kick in and we feel a change is needed or something should be done, when in reality our rules may say to stay put or do nothing.

As we head into the new year, I challenge each and every one of you to firm up your rule list. Put them right beside you when you trade and get into a habit of reading them day in and day out. Rules will take your trading to another level and like my rules saved me from a very costly and emotional mistake yesterday, I am sure they will save you many times in the future.

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Positions in ENER, CME, PZE

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