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pline (belief or rule) to always steer into a skid. Today, if we go into a skid, we do the right thing without even thinking about it! Our belief (or rule) about turning into the skid may have saved our lives many times. In this sense, discipline is nothing more than a belief that is never questioned once it is learned and that we must always obey. |
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As a trader, you must develop the same level of discipline. In a game where there are no rules that you must follow, you must establish your own rules. The trading environment has no rules telling you when to enter, when to exit, or how many contracts to trade in. The only outside rules are those imposed by your brokerage firm. The brokerage company does not care one iota if you win or lose; it gets a commission regardless. The Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) don't care if you make or lose money, provided you obey the reporting and margin requirements. |
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One of the challenging things about trading is that there are no real rules. There are plenty of general rules, such as "Buy low, sell high." Of course, buying low is never defined. How do you know a price is low? How do you know that it isn't going lower? What exactly is selling high? If you were fortunate enough to buy "low," how do you know that you are exiting the trade at a "high" price? What happens if you exit the trade and the price moves higher? What happens if you indeed do buy at a low price and then exit at a higher price, and after the price drops a little it reverses, continuing much higher? Do you have the rules to reenter the trade? Or do you sit on the sidelines silently fuming that you got out too early? |
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Here is another perfectly sound general rule: "Let your profits run, and cut your losses short." This is a valid rule, and it is totally worthless. Can you define profit? Is it a 3-point profit? Or is it a 300-point profit? How about a loss? Is it a 3-point or a 300-point move? What does it really mean to let your profits run and cut your losses short? How do you know when you are in the trade that your profits are running, and your stop loss point is being kept close? Are the experts who state this rule with solemn dignity implying some sort of ratio? Perhaps that for every possible $100 gain we should be willing to lose $30? Then again, how do we know what ratio to use? How do we know that the losing trade isn't about to turn around and become highly profitable? |
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One more example: "A market will usually retrace 50 percent of its move." Says who? The "experts" tell us that the markets like to retrace to a Fibonacci number. There are plenty of examples of this taking place, so after we miss a major market move, should we then wait for the 50 percent retracement? What happens if we buy at the 50 percent retracement level, |
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