As this article is being prepared, there is a temptation to title it “who’s doing the trading, you or the committee?”
Most self-directed investors and traders have found trading from a desk at home is at times lonely. If you have been trading for a while this is not news. When markets are going their way there is no one to celebrate with, and conversely when trading is not going well there is no fall back into the comforting and encouraging dialogue of the psychology coach which everyone seems to look for in dark times of trading.
Or is there? What about that little committee of voices that we sometimes listen to? That little voice that sits on our shoulder constantly coming up with different scenarios and debating a course of action when a decision is required? That committee is the voice that suggests we stay in a winning trade a little too long to watch the profits whittle away or stay in losing trade just one more day with all the correct reasoning for the decision that actually makes sense at the time. Regardless of the action, the committee is able to provide justification.
Firstly let’s look at what a committee is supposed to do. As described above, a committee is subordinate group brought together to provide discussion and to vote on an outcome. This is then relayed higher up for further decision making.
As described, the committee will provide several different answers. And each one is formally voted on and passed to a higher level. When we shrug our shoulders and say “ I don’t know”, this simply means the committee has not come to the vote.
Taking the next step
One of the hardest questions I was ever asked is: what do you want from your trading? This really was a lead in to ask, why are you trading? If you cannot write the reasons for why am I trading down on a piece of paper, get one out now and make a start.
The other questions to answer are:
- Why do I take an interest in the markets and risk my capital?
- Why do I go to those trading meetings and listen to webinars?
As experienced traders find out and every trader will eventually discover, this endeavour may be the hardest vocation ever attempted, so there needs to be a very clear “why”. This reason must be so strong it will keep the trader focused on his or her target outcome no matter what the market provides in the way of price movement and volatility. If this “why“ is about “beating the market” for returns, rethink! This is far from a specific outcome and does not take into account bear markets and market corrections. If beating the market is about losing less than a falling market, this is not trading – it’s just managing capital.
Cutting to the chase
Committees came in different shapes and forms. One of the strongest is the personal ego. When the ego committee gets hold of the “why” there are all sorts of debate and the requirement for more information to come to a conclusion to satisfy the ego itself. Bad move!
This ego driven decision making often has nothing to do with the market movement itself, but rather holding out to the originally desired outcome (in effect holding on to bad trades waiting for the outcome that will satisfy the personal ego of the trader).
It’s very easy for the trader to identify ego trading when a number of indicators or reports are referenced to justify the position. The other way to know it’s ego trading? Have you ever heard the words “it will come back”?
Rule based trading
Everyone knows about it, but very few master the ability to put the committee aside and let the market trade for you with rule based trading.
There are an infinite number of potential trading systems based on types of market and different time frames. At a common level, however, the trading system that works is price-based entry and exit, as all markets offer this daily.
A trading system can be designed by a trader to suit their lifestyle and risk profile. At the end of the day the system itself has to trade not the trader. The trader is best advised to work on ways of eliminating the committee based trading system and letting the rule based trading plan do its work.
This is where survival in the markets begins.
Rule based trading has fixed entry signal and fixed exit levels. Rule based trading does not refer back to the committee for information or clarification. Rule based trading is a trading plan written down. Rule based trading has the actual trade identified and mapped out before the entry order is placed, and this includes risk per trade and position size for the position. Finally, rule based trading know the maximum risk before the trade is placed.