I’m sure many of you have followed the rules in a trading book only to come unstuck.
Why is it that you can do exactly what the book says, but still find your account balance steadily falling?
I know I have certainly suffered from this.
The problem is this: trading books that contain specific rules lead to the illusion that you are in control.
You can follow the rules in the book, cutting your losses exactly when you are supposed to, but still suffer the proverbial “death by 1000 cuts”.
Because markets change.
If the ideas in the book do not work so well anymore, you will get stopped out over and over again trading them. You will find your trading account balance slowly draining, despite your belief you are following a winning set of rules with superior discipline.
A classic example of this is the famous “turtles”. The turtles were a group of wannabe traders given a set of trading rules that they used to make hundreds of millions. Now the rules, which have been freely published, don’t work. Attempts to follow them only result in pain.
Essentially, because the rules are codified in a “book”, it gives you the impression that the ideas are correct. Therefore, you continue to be willing to risk money over and over again on the ideas contained inside.
Traders who are successful in the long run adapt. If they do use rules, eventually they will break those rules. Rules tend to be applicable to a market at a specific time. Good traders realize this and change their approach. Bad traders get annoyed because they are still doing what they used to, and losing.
A book with specific rules is like the bad trader that does not adapt. It systemizes what worked at the exact time of its publication, which may not be relevant to what is going on now.
The challenge is that most traders lack confidence in their ability so they tend to trust too easily in what they read.
Blind application of rules is a recipe for disaster.
The solution is twofold.
- Take a leaf from Hedge Fund Manager Ray Dalio and look for principles that are universal and timeless. Don’t focus on the technique, focus on the underlying principle behind the technique.
- Recognize what has happened (and is happening), and trade in the moment with a full sense of awareness.
By doing this you can quickly tell if what you read is valid to the here and now. In short, trade the present, not the past.
This is why we wrote the Advanced Course for Smart Traders around the famous Market Wizards. It’s not about specific rules that are limited to certain markets at certain times.
It’s about the immutable and ageless principles and practices that you can adapt to trade the right way for the present moment. Get free access here.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access). He is the owner of www.fxrenew.com a provider of Forex signals from ex-bank and hedge fund traders (get a free trial). If you like Sam’s writing you can subscribe to his newsletter.