Having a system of rules greatly improves trading. It makes you faster, consistent and more confident. A system can be just a few principles and these can be very simple. For example, when to enter a position, when to take a profit or a loss or what to do in a certain situation. The great thing here is that you are the one who creates those rules and the one who can change them (but let’s not do it too often).
One thing is extremely important. Once you have rules, you have to stick to them.
I have a good story that popped up in my mind during one evening in the cinema:
It was the last “Alien” movie. Have you watch it? I know, it might seem it does not have much to do with the financial markets, but we can learn something here. The crew in the movie had a mission. For that, they had several rules. The problem? They were constantly breaking their rules. First, they had a certain aim, to reach their destination, and were not supposed to stop at different planets…they stopped at the one with the alien. Next, one of their rules told them not to leave the space ship…they did it. Then, when things went really wrong – and this is the most important moment when you have to stick to your rules – one of the crew members, completely panicking, exploded the ship because of her fear. The rest of the movie was watching the crew being killed by the alien. Sorry for the spoiler.
The key word – discipline!
When you constantly break your rules, it leads to a disaster. No alien will probably eat you alive at the financial markets, but to be serious. Even there, breaking your principles can have fatal consequences.
Consistency is the key word. You have to repeat what you do and act similarly in similar situations. Otherwise, it is just a random walk through the jungle of financial markets and there you would need a lot of luck. If you have a system, good luck or bad luck does not have much impact on you.
There are plenty of different systems, also depending on what you do. One will approach long-term investing in a different way than a swing trading.
In the next posts, I would like to introduce you a few basic rules which I use for option writing. For example: (i) what is a proper size of one’s positions, (ii) how to cut losses or (iii) when to take profits. These might serve as an inspiration and with slight adjustment, they might be used for trading as well.
Stick to your rules and have a system.