Trading Rule #1 – Know Thyself
I am going to start this article talking about one of the most important things developing traders will need to know – that is to ‘Know Thyself‘. This recently came up for me as a newer student sent me a few emails which made me realize how important this is for anyone starting on the learning process, but hasn’t found the right trading system to trade from every day.
First I will start off with the student of mine and how critical it is for the trading process. Then I will discuss the importance of this rule, how it relates to you, what system you decide to trade, whether it is price action strategies, or ichimoku cloud trading (or whatever), and how this applies to your trading.
I will end by giving the rule which should immediately follow this one, which, my guess is will surprise you.
How It Began
This student of mine (we’ll call him James), had signed up for my Price Action Course not too long ago and was definitely an eager beaver. He jumped right into the material, asked a ton of questions, and wanted to know the details of the systems inside and out so he could use them properly. So far so good.
He eventually decided on mastering one system which was an intraday price action system focused on the 5m time frame. For weeks, that was all he traded, asking questions each day, sending me screenshots of all his trades to make sure he did them correctly, etc. He decided to demo the system until he was sure he had it down. Again, so far so good.
However, this is where things got interesting. He was having trouble getting comfortable with the frequency of the system (active). After trading the system for a couple of months, he decided to move on to another system, this time on a slightly higher time frame (1hr).
Obviously it was less active, but still active enough throughout the week (on average – a trade a day). Again, he took the same approach – trade it on demo to learn it inside out. Interestingly though, the same thing happened again. He was making money with it, but still felt uncomfortable with it when it went for runners.
So what did he do?
He hired a programmer to write an algo for it. He thought maybe the problem lie in himself (it usually does) but that an algo would solve his problems. Remember his process which was the same at every turn;
1) choose a system
2) learn it inside and out
3) practice it on demo for a few months
4) makes money (key note), but was uncomfortable with the trading process
5) looks for another solution
It was the last two parts of his process where I started to question things. My golden rule is;
If it happens once, its an occurrence
If it happens twice, its a pattern
If it happens three times, its a program (or with humans, a conditioned response)
The Common Denominator
To me, something wasn’t quite right as he was making money with the systems (most people would be happy with this), but was still uncomfortable in the process and thus searched for another solution. I decided to see where this leads before making my suggestions.
After getting the system programmed, he decided to let it run. It started to lose money and he couldn’t figure out what was going on. He questioned himself, why he paid for the programmer, if he picked the wrong system to program, was it a bad time in the markets, etc. Turns out the programmer had made a mistake in the coding so the system wasn’t trading properly.
So what was his response? He emailed asking about my shadow system. This is the system I wrote about in Ode to The 4hr Charts.
Remember this one…whereby my student Tony traded one system, on one pair (AUD/USD) on one time frame (4hr charts – go figure). Tony did 110% on the year, was profitable on every trade for the last 2.5mos of the year, was about 60% accurate with his largest winner far larger than his largest loser.
It turns out James (looking for answers where to turn next) read this article and thought this was it. So he started asking me about it, emailing a ton of questions, a lot about performance, if he could learn it, what would it entail using this system, etc.
Now before we continue, lets map out his progression of the systems he has gone through;
-5m intraday reversal system
-1hr momentum trading system
and now, wants to learn the next one…
-4hr swing/trend trading system
Do you see the pattern here? Other than each system gets progressively higher on the time frames – there is no pattern. Its all over the place. There is no consistency in the style, type of system, time frame – nothing. The common denominator in this process is not the system, it is him.
Has this ever happened to you in your trading process, or is this happening to you now? Have you gone full polygamy on systems, that you’ve traded every time frame imaginable, every type of system imaginable, but still haven’t found your weapon of choice, one that performs the way you want it? What is the one root cause of all this?
Rule #1 – Know Thyself
As a trader, my job is to find opportunities in the market, exploiting my edge week in-week out, to make a living from this and profit for my clients.
However, as an educator, my job is not just to provide systems to students that make money. My job is to help them with the educational process (wherever they are at) and find a solution to help them turn the corner.
Considering very few students are the same, I have to find out what is their trigger, what is holding them back, and how they can correct their mistakes while strengthening their weaknesses. But, if there is one response I get a lot from developing students, it is this one to the following question:
‘What type of trading are you looking to do and what are you looking for in a system?‘
This is really a probing question to gauge where they are in the process and what will be their best path forward.
Can you guess what answer I get most often is?
‘I want a high probability system that consistently makes money every month with very low draw-downs‘
No shit, that’s what everyone wants. But here is the kicker…
What if I provided you with a system, which does virtually that, which made over 100% last year on one pair and one time frame.
But…(big but here), you had to hold a position for several days, perhaps over the weekend? What if that system only traded 8x in one month, or 18 the next, and you were not trading everyday? What if you had to go through a two month draw-down period, but would still do over 30-50% return on capital at the end of the year? Would you still want to learn that system?
If the answer is YES because all you care about is making money, then your not understanding rule #1 – Know Thyself.
If the answer is YES because you are comfortable holding positions for days, don’t want to trade every day, and are ok with having one or two months of draw-downs, then this would be a good system for you, because you understand who you are..
The same goes if your answer is NO because you want to trade everyday, and do not want to hold positions overnight, or over the weekend. That is being honest, and that is ‘knowing thyself’.
The Importance of It
Why is this rule so critical to your development and learning process?
Because your personality, style of thinking (left brain, right brain, whole brain, no brain, whatever), personal schedule, temperament, level of patience, etc. will all come into play when trading your system. If your allegiance is only to profit, this will become a problem.
If the system doesn’t match who you are as a person (style, temperament, schedule, etc), a tension will be there everyday which will eventually turn into a friction in your mind – like having a car which doesn’t fit your needs (2-Door Scion when you have 5 kids).
What good will it be, if you only have an hour to look at charts, and trading a system whereby you need to be at the computer for 3-4hrs at a time?
What good will it be to trade a system which requires you to wait for days to get a signal, when you have ADHD?
What good will it be if you do not want to be in front of the computer for hours, want more free time to enjoy life, yet have a system which you have to be there at certain times for hours on end?
By Knowing Thyself well, you can find a system and style of trading which matches best with you, your lifestyle and mentality. Perhaps you prefer trading with no indicators and want something simple and completely rule based? Then maybe you would want to learn how to read and trade price action.
Perhaps you are comfortable with more intricate systems, like ichimoku cloud trading. It doesn’t really matter what the system is, whether it has a 10%, 20% or 50% edge.
What matters more than anything else, is you find a system and style of trading that works best for you. And to do this, you have to start with rule #1 – Know Thyself.
Maybe it is not rule #1, which is certainly open for debate. But it is definitely up there in the top 5, and could be in a photo finish for first place. What matters is, unless you are totally settled into your system and consistently making money, you will need to start by knowing yourself – figuring out who that is, style of thinking, what is your current lifestyle, what kind of lifestyle do you want to have, and what systems will match up with this.
Once you have found this, then you can begin the journey by working with a mentor, and finding a system which suits you most.
I hope this helps and that you found it useful. I definitely look forward to your comments and wish you all the best in trading.
P.S. Oh, I forgot to mention, the follow up rule which succeeds this one……is to ‘Forget Yourself‘. But this is a more advanced rule, which we will get into later.