Before we get into the actual blog post, I’d like to share how I came up with the idea for this blog:
This week in chat, a trader posted that he was frustrated because he let a winning trade turn into a decent sized losing trade. I gently reminded this trader that we have a few rules to prevent that type of behavior. In fact, this rule is one of the first things I learned from GSP back in 2010 and it had an immediate and HUGE impact on my P&L. Another trader chimed in and stated something like this: We KNOW the rule Wayne, we just have a hard time following it!
Hmmm. Good point I thought to myself. Knowing and understanding a rule versus actually following the rule is a problem for many people. Some people quickly pick up on rules and start following them right away. Others, not so much. Years ago, I was one of those who had a hard time following some of my own rules. I thought I’d share how I overcame that and the methods I used to help me start actually following my rules. Here’s the blog:
Most Day Traders quickly realize two things:
1: Having a good concrete set of rules to follow is key to their long term success and consistent profitability.
2: Actually following those rules day in and day out on EVERY trade is super difficult and much harder than most traders would ever anticipate.
In addition to the trader I mentioned above, we also had two other traders reach out to us and ask for help this week. Although these two traders couldn’t be more different, their problem was exactly the same:
They both broke several rules this week and it cost them "BIGLY" on their P&L.
So, rather than beating the drum on how important it is to have a concrete set of trading rules (read this blog for that), I’m going to give you 10 Best Practices that I personally use to make sure I adhere to my Day Trading Rules every day for every trade:
1: Make sure your rules are written down or typed out. Having just a mental list of rules is not good enough. Your rules should be easily accessible and highly visible. Writing things down on paper and/or typing them into a document helps you remember those things later whether you realize it or not.
2: Read your rules every day. I read my rules out loud EVERY SINGLE MORNING. In fact, I do this at exactly 9:15am every morning because that’s when it fits into my morning routine. Reading your rules daily helps ingrain them in your brain.
3: As you’re reading your rules, remind yourself of WHY the rules are necessary to begin with. Example: Let’s assume one of your rules is ALWAYS HONOR YOUR STOP. After you read that rule remind yourself what happened the last time you didn’t honor your stop: "Instead of losing $109.90 on my $LEDS trade I lost $409.90!" Basically, you need to remind yourself of the consequences of NOT following your rules.
4: Reprioritize your rules as you break one and/or the market changes. Both the traders I mentioned have a new #1 rule for next week: NO FOMO/NO CHASING – just get the next trade.
5: Dig into WHY and the reason(s) you broke the rule(s) in the first place. Ask yourself what caused the problem. You can’t fix a problem if you don’t know what is causing it. By the way, 98% of the time this is a mental/emotional issue.
6: Talk to someone else about what you did. Be open and honest. Ask them for advice and how they fixed the issue. This is where having a trading coach/teacher/mentor/twitter friend/chatroom/etc. can really be helpful.
7: Develop an action plan to get back on track. Merely saying “Ok, I’m going to follow rule #1 all next week” isn’t good enough. Put pen to paper on exactly HOW you are going to do that. Example: For one of the traders who didn’t honor his stop this week, his action plan is to immediately put in a hard stop for every trade he takes. And I’ll point out he’s cutting his position size in half.
8: Pick your battle. Eventually you need to get to the point in your trading when you’re following ALL of your rules. However, if you’re struggling with many or even a few right now, just concentrate on one at a time. Focus on the one that’s costing you the most money first. Once this is fixed and has become habit, then move onto the next one.
9: Establish additional consequences. The first consequence of breaking a rule is usually losing $$$. Unfortunately for some, the pain of losing money isn’t enough. It takes more than just losing money to get through to some traders. Ideas on additional consequences: Stop trading for a bit. Cut your position size way back. Completely cut out the set-up you broke the rule on. Etc. Not only are these consequences but they’ll actually help keep you out of trouble until you get some confidence back.
10: Reward yourself for compliance. That’s right, pat yourself on the back or even take it a step further. Example: Go a week without breaking a rule – treat yourself to a nice dinner out and/or your favorite adult beverage of choice. If you follow all your rules for a week you probably have a little extra disposable income anyway. When you’re enjoying your reward make sure you remind yourself (and anyone you’re sharing your reward with) why you’re getting the reward in the first place.
Having a list of rules is a great start and a crucial part of the Day Trading process. Actually following those rules day in and day out on every single trade is the hard part but is crucial to becoming a consistently profitable trader.
You have to ingrain the rules into your brain. Your rules must become habits. Many argue that takes 21 days for a new behavior to become a habit. For many Day Traders, it takes a little longer.
Hopefully the 10 ideas listed above will help you follow your rules and maybe even shorten your learning curve.
Questions? Comments? REACH OUT!
By the way, here’s one of my recent rewards (it works for me):
