Despite of all the common advice in trading psychology books I’ve been reading I was never quite able to develop an extremely rigid trading rules in my system. Mark Douglas suggests to “have rigid rules and flexible expectations”. However, due to my belief of how the Market works, I find it difficult to explain my analysis or trading patterns in simple “if… then” terms. If I would ever teach anyone to trade, the best instructions I could offer would be something like:
- Make absolutely sure your Money Management will never allow you to lose
- Learn trading psychology (accept the risks and responsibility)
- Watch the Market daily
- Build an opinion
- Embrace uncertainty and test your opinion with your money
- Learn from the feedback Market is providing to you
In my mind, most of the trading setups have always been relatively subjective. The Market would just “look like” going down. At some point I just “feel like” getting out. However, the more I trade the more I recognize that there is certainly a place for fair amount of objectivity in trading as well. I just do not believe that objective concepts can be applied just about anywhere in my trading.
Cutting right to the chase, here is where I would try to define my trading objectively:
- Money Management rules
- Business organization (trading diary, trade analysis routines, preparation for trading routines, etc.)
- When NOT to trade
- When I pay myself – take my first profit and put the remainder of the trade in BE (e.g. close 30% at clear Reward:Risk target like 3:1)
- Checking minimum conditions any trading setup must have
And here is where I would trust my feelings and intuition (apply subjectivity) in my trading:
- Most of my market analysis, i.e. building an opinion or a bias for certain trading instrument
- Final decision whether to take an entry
Basically, what I am doing, is building a strict, rigid framework that protects me from making big mistakes and provides some structure for my trading. Next, I allow myself certain amount of freedom inside of that framework where I can trust my intuition (experience) about the Market.
For example, I am making sure that no matter what happens, any trading day, week or even month CANNOT result in a significant loss (1). I also know what kind of work I must do every single day in order to manage my trading properly (2). I am making sure that under certain conditions (Market environment, life situation, etc) I am not going to trade because I do not believe that my intuition/emotions will provide appropriate judgement under such conditions (3). Next, I am making sure that I pay myself automatically, without even evaluating the current situation on the Market, as soon as certain amount of profit is reached (4). Additionally, before executing any trade I will make sure that it has some necessary parameters that I have defined – this gives me confidence to pull the trigger without hesitation (5).
However, I have to leave most of the Market analysis up to my intuition. Even though I have certain rules and checklists for Market analysis, in the end they only help me to clarify how I am feeling about the current Market situation (1). Additionally, even when I have a bullish bias on a certain currency and all minimum conditions are met to establish a position in that direction, I will still choose to miss that opportunity if I do not feel good about it (2).
The implementation of subjectivity in our trading is extremely difficult unless we are self-aware of what is going inside. It is still important to analyze our emotions and opinions, making sure that they are not caused by anxiety or some psychological issue that we were not able to resolve completely. Obviously, I am nowhere near perfection reading myself or the Market. However, I find it impossible to trade unless I listen to my intuition. I cannot build strict logical boundaries around my life and so I do not expect to put any part of my life (e.g. my trading) in a box either.
Recommended reading: Intuitive Investor by Jason Apollo Voss