I have been thinking about my rules. Rules are important to follow, but if trading were just rules anyone (or any computer) could do it. Similarly, rules are important in chess, but if you only follow rules you will not be any good (unless you can compute 200 million positions per second). Intuition is our edge. The way we can feel the market is what really makes us good at trading. Basically, this inuition is just the human brain’s amazing pattern recognition capabilities. You can’t ignore your trading intuition – you will only give away your advantage. The computers can’t feel the market like we can – yet.
A rule I have is to let my winners run. It’s usually a good rule. But today it wouldn’t have worked with the trades I made. At around 1pm today I closed out everything for a profit because I didn’t like the way things felt. It worked. Richard also made a similar profitable trade based on his intuition.
But this doesn’t mean that rules are unimportant. They are very, very important in trading. After thinking about this a lot lately, I believe that rules (at least for me) are especially important when dealing with risk management. I don’t ever want to break a rule that has to do with risk management (e.g. pulling a stop, overtrading…). I need these rules as a safety net and I won’t even let my intuition interfere. Other rules (e.g. letting your winners run) may not be as important if your inuition is telling you something different.
What I’m trying to say is that you need rules but you can’t always let them get in the way of your intuition. You need rules to keep the emotional part of your brain from taking control. Trading with intuition is okay as long as you are not trading with emotion.
Also worth noting today is the large chunk of QQQQ (4.5 million shares) that passed by at 2:30:

Another thing I’d like to mention is that when I post about my frustration or feelings about trading (e.g the AMR incident), I am only posting about my frustration or feelings with trading, and not with life in general. When I say (half-sarcastically) that God is against me, I only mean to say that he has the other side of my trade, and not that he has given me a bad lot in life. I am well aware of the extreme luck I have been given in my life – I am a card-carrying member of the lucky sperm club. I try to think that the troubles I have are due to my own mistakes, while the good things come from luck.

This entry was posted on Monday, September 18th, 2006 at 6:11 pm and is filed under trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.