If break rules and earn profit?
- Thread starter innovest_11
- Start date
As a discretionary trader, I have a systematic and consistent approach to trading the markets, but there isn't a rule that I haven't broken, legitimately. I have guidelines more than rules. The market is too complex for it to fit into "hard and fast" rules all the time, although most traders would like to believe that that is the case. I believe that as one becomes an experienced trader, one jettisons "rules" for "guidelines" and focuses more on capturing the "spirit of the trade". Novice traders, whether discretionary or systematic, should probably follow rules all the time because they simply do not have the experience to override the so-called rules. I have found that as I became a more experienced trader, I have become less rigid in my thinking. Rules will only get you so far. Now, when it comes to managing risk, I think those rules should rarely be broken, if ever. Again, I'm talking from a discretionary trader's point of view, which I am. My opinion for systematic trading would be different though. No doubt that others will disagree, but that's what makes a market. 
Assuming you keep detailed statistics on your trading, I wouldn't count that profit on your P&L because you shouldn't "get credit" for that trade. In fact, if you otherwise would have taken a loss, I would deduct that loss from your P&L.
Also, since everyone makes mistakes, consider this profit a "payback" for the times you've missed a similar size profit in the past due to a mistake.
Also, since everyone makes mistakes, consider this profit a "payback" for the times you've missed a similar size profit in the past due to a mistake.
Some good responses already. Obviously, the considerations are different for pure systems traders. Following rules for them is not optional, because if they don;t follow them, they have abandoned their system. That is said to be the single reason most systems traders fail.
For a discretionary trader, I think you have to separate the rule into one of two categoreis. Is it one that has been rigorously backtested? Or is it one that is more arbitrary, based more on common sense, comfort level, etc?
The former type of rules, those that have been tested and form part of your core methodolgy, should be followed pretty rigorously. For the latter type, I think they can be expreimented with without too much fear, provided you maintain risk discipline.
Let's look at premarket trading. A lot of times, it probably is random, particularly in stocks. If the company announced earnings the night before however, then you have a completely different dynamic at play. Premarket offers plenty of opportunities. So I would argue that one rule for premarket is somewhat arbitrary.
In my expereince, people get into trouble for failing to follow two rules. One is loss discipline. It can be awfully tempting to let a trade ride sometimes when your exit point and a support level seem to coincide. You know if you get out and take a max loss, there is a good chance it will bounce. Very tempting to stay in a little longer, but if that support level breaks decisively, you are looking at a catastrophic loss.
The other is position size, as alluded to by murray turtle above. If you want to risk getting blown out, then take way too big a size on a trade for your account. That way, you will be under so much pressure you can pretty much count on violating other rules. And maybe it's just me, but tempting fate by going for a big score seems to always end in tears.
For a discretionary trader, I think you have to separate the rule into one of two categoreis. Is it one that has been rigorously backtested? Or is it one that is more arbitrary, based more on common sense, comfort level, etc?
The former type of rules, those that have been tested and form part of your core methodolgy, should be followed pretty rigorously. For the latter type, I think they can be expreimented with without too much fear, provided you maintain risk discipline.
Let's look at premarket trading. A lot of times, it probably is random, particularly in stocks. If the company announced earnings the night before however, then you have a completely different dynamic at play. Premarket offers plenty of opportunities. So I would argue that one rule for premarket is somewhat arbitrary.
In my expereince, people get into trouble for failing to follow two rules. One is loss discipline. It can be awfully tempting to let a trade ride sometimes when your exit point and a support level seem to coincide. You know if you get out and take a max loss, there is a good chance it will bounce. Very tempting to stay in a little longer, but if that support level breaks decisively, you are looking at a catastrophic loss.
The other is position size, as alluded to by murray turtle above. If you want to risk getting blown out, then take way too big a size on a trade for your account. That way, you will be under so much pressure you can pretty much count on violating other rules. And maybe it's just me, but tempting fate by going for a big score seems to always end in tears.
each trade you put on ,should have a target for profit and loss,if it goes against you and you are at your loss target ,you have to re assess, the risk of it going further against you,depends on the strength of the move and s/r areas beyond,your rules should always be about managing risk vs maximizing gain from the action on the screen,a highwire artist has one rule,don't fall..moral of the story, less rules..keep it simple