A very intelligent, and understandably frustrated, trader emailed me recently and it brought to mind the tension that exists between obeying rules and following instinct.
The hardest thing in the world for a discretionary trader to do (after learning to risk less) is find a balance between . following strict rules and following his instinct. Why? I think it's because he feels that if he strays away from a set of "rules," then he is bending rules that were meant to work. And if he sticks to the rules and fails to make a profit, he is upset because he sensed that something wasn't working but he didn't do anything about it. So he returns to changing the rules a bit, but he feels like he's out in the great wide open and floating aimlessly, without any solid rules.
In short, rules make the trader feel comfortable (not to mention able to hold the rules responsible for the losses, while giving credit for the wins to his instinct). But a lack of instinct or flexibility in applying the rules leads to enormous frustration when applying the rules robotically doesn't work.
The point here is that any discretionary trading system that you can learn (and there are hundreds freely available in books and on the Web ) is meant to be a framework from which a trader can start to form his own opinions. Such as:
1. Hey, the [insert name of trading strategy here ] is cool! I am going to use these basic rules as a starting point for my analysis.
2. But I don't like trading the strategy around newstime. But I do like trading the strategy on a particular currency pair, on a certain time frame, when these other conditions are also met. But I'm going to watch out for price patterns and make sure I'm not getting into the market when there is a "wild boar" candle pattern or some such thing.
The basic rules of the system thus become a starting point. And when you use the rules as a starting point, you start to learn how a currency pair behaves and operates when held up against a framework/set of indicators (rather than using the indicators as if they could predict every move).
Now that I've said all this, I want to ask you:
1. Do you feel that you are meant to be a mechanical trader or a discretionary trader? Does the thought of being a mechanical trader bore you to tears?
2. Do you feel that there is a set of indicators or method that bank traders or successful traders use, and if you could just learn it you would be successful too?
3. Do you feel that NOT having a strict set of rules would leave too much open to interpretation? If yes, would you be willing to sacrifice discretion in order to trade something strictly? Or is having flexibility that comes with a "framework" mentality really important to you, because you will have a sense of "involvement" in the trading decisions?
