Breaking the Rules

You are remembered for the rules you break. 

Douglas MacArthur

Ever notice the traders/investors who make the greatest profits also tend to take the greatest risks. Rule breakers who go their own way. They search for innovative methods. They think outside the box. From Jesse Livermore to Paul Tudor Jones, Warren Buffet, there are many inspiring tales of talented, super traders/investors who make huge profits by bending the rules and doing whatever they want. There are far more, however, who blow out their accounts because they don't bring the proper amount of discipline. You' must learn the rules before you can break them. If you're a novice, focus on learning conventional wisdom and how to trade with discipline. 

If you are new begin by following some basic guidelines. First you must have a well defined plan clearly defining how you will enter and exit. Secondly you must learn to manage risk. More than just protective stops you must learn how much of your account dollars to spend on a specific trader/investments and whether or not you should accumulate a position piece by piece or jump in all at once. Additional conventional techniques; avoid such things as trading in the first hour or just before an earnings report.

Conventional wisdom is only right when it is, but as a new trader/investor  you don't know when it is right and when it is wrong. In time you will begin to value your experience. The more experience you accumulate, the more you can anticipate how the markets will behave and how you should act. Some jewels of conventional wisdom are right much of the time, and you should keep some of them in mind. The important point is to survive the learning curve. If you are still inexperienced don't take on a big position like a rogue trader looking to score big profits unless you are absolutely sure of what you are doing. Look at the big picture. Any given trade/investment is just one among many, but this is only true when the amount of money you risk is relatively small. If you risk 50% of your account on a single trade then it isn't just a single trade amongst many any longer. It has potentially grave consequences. Manage risk; it's conventional wisdom worth following.

When you have years of experience under your belt and become a master you may well know when to push limits. An experienced trader/investor understands when he gets on a roll and knows that things are clicking. It may be breaking the rules, but to the master, it is how big profits are made. I must note however, that masters' can afford to take a greater risk. They have well-honed skills, and should they lose substantial amounts of capital, they can diligently work to make it all back. A new trader, in contrast, will have more trouble making back losses, and should they realize a big loss, they must stop trading and recover financially before attempting to trade actively again.

A strategy that worked well one month may no longer work when conditions change. The master is continually looking for new strategies and tries to look at the markets from new perspectives. While the masses look at the market in simple terms, the master is more creative. He looks for a new vision, and tries to develop a strategy that will capitalize on a unique set of market conditions. Masters' can afford to take bigger risks, newer traders cannot. It is not a good idea to be too unconventional at first; eventually however you will become more creative and go your own way. That is if you wish to reach the status of a seasoned winning trader. Until then keep trading cautiously at first but gradually push yourself to new levels.

Do You Have A Detailed Action Plan?

It is important for investors to understand what they do and don't know. Learn to recognize that you cannot possibly know what is going to happen in the future, and any investment plan that is dependent on accurately forecasting where markets will be next year is doomed to failure.

Barry Ritholtz

Anything we do well we do from a subconscious level without thought. Driving a car is an excellent example of subconscious operation. When we need to stop or accelerate quickly, change lanes, or make a quick turn we don't think about it we just do it.

It wasn't always that way. When we first learned how to drive we deliberately thought out and planned every move. At first you needed to consciously and deliberately perform each action over and over. Over time and with practice you learn to perform each task with more skill and eventually with hardly any thinking at all. 

This learning process is true in most facets of life. We learn through repetition or practice. Despite intuitively understanding this, many new traders think they can trade on the spur of the moment, instead of carefully planning a trade or investment, while following a detailed plan. Detailed plans are an essential ingredient for success. Lacking the necessary experience a novice trader/investor may find it difficult to trade on the spur of the moment. 

With too many issues to attend to you are bound to make mistakes. Dr. Peter Gollwitzer, Professor of Psychology at New York University, has conducted several studies that demonstrate the benefits of making specific plans that outline when, where, and how to perform an action. If you have not previously done so it will be a great exercise to write the following as part of your plan:

• If market condition A happens;
• And stock condition B happens;
• And chart pattern C appears;
• Then I should enter: (A partial position? A whole position?)
• At the market or put buy stop Z into affect.
• Then I will set my protective stop and monitor this trade until an exit occurs.

Elaborate as desired and/or needed! Knowing when, where, and how helps you perform effortlessly and gracefully. Specific plans help us respond quickly and automatically when it is necessary. When we make a plan beforehand, we can

follow it, acting swiftly and efficiently. 

What does research on making plans reveal? During studies on making specific action plans, Dr. Gollwitzer argues "plans allow people to more easily remember what to do specifically. They don't waste time trying to recall what it is they are going to do. They have decided what to do, and when, beforehand and have little trouble doing what they had planned. Secondly, research "people respond quickly when they have a plan to follow. Thirdly, when people have a plan, they can effortlessly ignore interruptions and distractions. They are able to more easily focus on the task at hand, maintaining self-control." If you have a clearly defined plan you will be ready to respond efficiently when the proper and optimal conditions arise. We respond not only swiftly but confidently when we have a plan. If you want to trade/invest like a winner make a detailed plan and follow it!

Become Innovative and Creative

Creativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn't really do it, they just saw something. It seemed obvious to them after a while. That's because they were able to connect experiences they've had and synthesize new things.
Steve Jobs

There are times when your success depends on thinking differently, outside the box. In a

strong bull market, it is easy to ride the wave and take advantage of the trend. But when the market averages are not trending (which is most often), it becomes a stock pickers market, a little more skill and ingenuity is required. Think creatively, and that means putting in extra effort and going with your gut and intuition.

Trading is not rocket science: figuring out how to fly to the moon or a way to orbit Mars. Being a mathematical genius will not make you a brilliant trader. Indeed, you are probably better off if you do not make it all so complicated. It may be counterintuitive, but keep it simple. Complex mathematical formulas do not seem to work. If they did, scientists, engineers, and mathematicians would be making millions trading the markets. They are not.

You cannot expect the kind of certainty a rocket scientist expects. It does not exist in the markets. There are too many unknown and immeasurable factors to consider. It is next to impossible to know which factors will come into play at a particular moment in time, and account for all of them. Market action is ultimately the result of people making decisions, and when the discretion of people are involved, it is impossible to anticipate exactly what will happen. 

You must become innovative and creative. The more you know about your creative processes, the better you will be at trusting your intuitions. Avoid trying to be creative, if you push yourself this way you will not be relaxed and you ca not be creative if you are not calm and allow free flowing thoughts. The state I am trying to describe is like a meditative one, where you are thinking about the markets but not attempting to force a brilliant idea. You also need a great deal of information to sift through, be it technical information, fundamental information, economic information, or a combination. Do not force yourself to

discover a brilliant idea, just read the information in order to get your creative juices flowing. Study the information. Memorize it. Let it churn in your mind over and over. When you least expect it, you will develop a few good creative ideas. It may be as you drive to work in the morning or are picking up the kids from school in the afternoon. Allow your mind to actively, yet leisurely, consider a variety of issues, and all of a sudden it will hit you, "Wow, I've got it."

Of course your idea is not foolproof; it is not guaranteed to work. There are just too many factors that are unknown and unknowable at the time you take the plunge. That is where risk management comes in, but you knew that. Just because you did not anticipate all the factors does not mean you did not have a creative idea, uncertainty is just a part of trading. Just keep trying, you will find your search for creative ideas is endless. You will greatly increase your odds of success and that in turn will lead to enduring financial success.