A “Philosophy” of Making Trading Rules

A coaching client in Hong Kong recently wrote this in response to a homework assignment. It is so good, in my opinion, that I want to make it available. Let us know what you think?


You asked me what would be the smallest number of rules I would need to trade well. I dearly wanted to keep it down to three but in the end I came up with five.

It was really useful to think about what makes a rule a good one. In the process of doing that, I realized how the rules I formulated in the past have not worked because they have all felt restrictive, and in some senses undermining, all I’m sure down to my ‘authority issues’. I’ve tried to address that in how I frame the rules. And at the same time, I’m trying to change my thinking about rules.

What I think makes for good trading rules:
Rules that I can live by: my rules have to be rules that I stand a good chance of keeping, not the kind that I will follow for one day and then give up the next. I’m not the kind of trader that can follow rules mechanically, like if x happens 3 times then do y.
Rules that I own: my rules must belong to me. They must be rules that I have adopted out of personal choice after careful thought to understand what exactly they mean to me, not out of a sense of having to follow the ‘101 of trading’ or what someone else has told me. Why? Because if my rules do not feel like my rules, I will subconsciously reject them. I may do so anyway, as I have authority issues; but the more I can imbue my rules with a sense of having been chosen by me out of my own free will, the more likely it will be for my subconscious to embrace them.
Rules that are integral to my trading approach: my rules should be an integral part of how I trade, not bolted on. They should feel like they are facilitating, not restricting, what I do. A stop, for instance, should be perceived as an opportunity, by getting me out of a losing trade so I can reenter at better prices or as a trading signal indicating that I should reverse my bias. Similarly, a timeout should be perceived as giving the market sufficient time to get to where I think is the best location for a trade.
Rules that are tailored to my weaknesses: my rules should help me work around my weaknesses. In particular, they should keep me out of trouble on trend days, as it is on these days that I usually run into problems. They should be preventative rather than reactive, i.e. they should steer me clear of meltdowns, rather than try to guide what I do after I have already gotten into one, by which time it would be too late as I won’t have the composure to follow any rules.
Rules that …keep me in the ideal mental state to trade and pull me out of trading when I am not. There are mechanical aspects to my rules, but only in so far as it helps me understand my mental state.

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