Trading mechanically with rules requires trading discipline. The easy thing is saying you will follow the system rules. However when things get tough – you get punched in the mouth – it can be very easy to abandon the rules…
…but that is absolutely the worst time to change course. A properly designed system will be able to handle those times you get punched in the mouth.
Here are some things to think about what you trade a system – whether it is your own system or a system like the TQQQ Trading Strategy.
Note: Here is a great article on rules that professional traders follow. A good list of things to think about in your own trading.
Trading Discipline Requires Understanding the Rules
The most important factor required to be able to handle the tough trades is to really understand how the system’s rules work.
The problem I see with a lot of traders is that they don’t know how the system reacts to different markets. It is easy when it is making money, however when the market takes a turn during a trade, you need to understand that process as well.
In the TQQQ Trading System eBook, I talk about paper-trading the system for a few month to get used to how it works. Unlike more discretionary systems, paper-trading the TQQQ Trading System is easy because the system is either on or off (i.e. no room for interpretation). Due to this, you can easily test the rules yourself and see how things play out over time.
Trading Systems Require Commitment
The second most important factor when trading systematically is to commit to the strategy. Most strategies in my experience require a long-term commitment to work as intended.
Short-term performance swings will happen. In fact, any system can go through a period of time where it generates consecutive losses.
That is when a lot of inexperienced traders give up and move on to the next holy grail.
However, for most trading systems, it is important to continue trading through these tough periods of time. Statistically, a good system will return to profitability if you give it time.
I have committed to trading the systems I trade for at least a year. The backtests I have done show that over time the system is very profitable, with losing trades sprinkled in. That is just the way things work.
Similar to commitment, patience is also important. Just like you need to be committed to the system, you also need to be patient and let things work as they were designed.
Give the system time to work; don’t abandon the plan when the going gets tough. Instead, review the system rules and examine the backtest results again to test your assumptions. That way you don’t overreact based on feelings.
Trading Discipline Requires Mental Toughness
A final trait required when trading a system with specific rules is having the mental toughness to overcome your emotions.
My personality is not wired to trade well from my “gut”. I have earned that I make the wrong trading decisions in the heat of the moment. My mind gets fuzzy and I panic when things don’t go the way I think they should.
As a result, I now trade with specific rules that tell me exactly when to buy and sell. This still requires that I have the mental toughness to follow the rules, but I am also a “rules-following type of guy”.
I will follow the rules – the checklist – which helps me break through those emotional battles a trader like me can have with themselves when they are getting punched in the mouth.