How Often Do You Break Your Trading Rules?

In my opinion, two of the quickest ways to end your trading career are (1) trade without a system and (2) break your trading system's rules constantly, which is basically the same thing.

However, I've also found that one of the best ways to improve your trading consistency, and the performance of your trading system, is to develop feedback loops that identify flawed strategies and costly behavior patterns and filter them out of future trades.

One way to do this is by keeping a detailed log of every time you break your trading rules. Each time you break a rule, record what rule you broke, what reason you gave yourself for breaking it, and the outcome of the rule-breaking trade (or missed trade).

Reasons you might give yourself for breaking a rule are:

  • This was an extra-special one-of-a-kind case because X happened
  • That's a bad rule anyway
  • This trade doesn't really count
  • I have a second unofficial trading system that exists in a parallel universe
  • I was angry about the previous trade
  • I was happy about the previous trade
  • I was tired
  • I was bored
  • I was scared
  • etc. etc.

Once you start identifying and recording the reasons you go astray, you're likely to become far more aware of the patterns causing you to break the rules, especially when you can see the consequences. Of course, you can't correct what you're not aware of, so with that awareness will hopefully come the motivation to improve your trading discipline.

You may even find that certain types of rule-breaking are consistently profitable (seems unlikely, but you never know) and may point the way to new trading strategies. But you won't know what they are unless you keep a detailed record.

Mental habits that betray us

Another potential benefit with implications beyond forex is that you'll come to know your own mental habits better. Trading can be an excellent case study in how you relate to the world, and by recording flaws in your trading, you may also start seeing other negative patterns in your life more clearly. For example, perhaps you're indecisive and procrastinate when you're scared, or impulsive and inconsistent when you're angry. Knowing these patterns can help you navigate around or through difficult patches more successfully in the future, both on and off the trading screen.

OK, I'm sure you get the idea...I'll save the rest for a self-help book ;-)

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