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.

know thyself matrix 2ndskiesforex.com

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.

confusion foto

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.

stressful brain

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’.

know thyself 2ndskiesforex.com

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.

Why?

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?

It won’t.

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.

temet nosce matrix 2ndskiesforex.com

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.

Kind Regards,
Chris Capre
Facebook: 2ndSkiesForex

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.

Buddhist, Trader and Philanthropist

I'm Chris Capre, Founder of 2ndSkiesForex. I help traders of all levels change the way they think, trade and perform. As a professional trader, I specialize in trading price action. As a teacher, my passion lies in showing you how to re-wire your brain for successful trading. Want to improve your edge right now? Visit my Price Action Course page.

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  • SSChiu

    Wonderful article Chris, but how can we honestly know ourselves? We may think we like this system better than another, but until we go through the experience of them, we may never realize what really suit us. Is there some kind of test that could allow an indication of our preference?

    • Hello SSChiu,

      Glad you liked the article. In terms of knowing ourselves, one generally has an awareness of your natural skills. For example, are you more intuitive when you make decisions or more analytical like a mathematician? Do you have a hard time being patient with things or are you relaxed enough to let a trade sit overnight?

      You’ve already had a lot of experiences before trading that can inform you of these basic things so that is a place to start.

      Yes, exploring them in the learning process is another way, but its really a question of how much time one has spent on self-reflection and getting to know themselves.

      I have been meditating for 12years and spend hours each day, just sitting with my mind. This bring familiarity for sure as do other forms of practice like this.

      Also, your dearest and closest friends whom you really respect and value their judgment will often be able to see your faults better than you sometimes. It is always easier to see other people’s faults, but much harder to see our own.

      So if you have a few people like that in your life, they can definitely be a resource.

      Hope this helps.

      Kind Regards,
      Chris

  • Graeme

    Thank you again Chris for making this kind of insightful information available to all traders.
    I made a decision a month ago and chose a coach/mentor who is opening my eyes to ‘trading reality’ but you tempt me regularly to go for ‘coach polygamy’ when you show how well you have your finger on the pulse of your students.
    I tilt my cap to you, when I think that you trade, educate, write books, family commitments and I am sure the list is longer than that.
    Getting back to your article, you chose the word ‘uncomfortable’ in describing James’ situation. The word ‘bored’ also came to mind.
    People come to trading wanting this ‘work’ to be a challenge, creative, a buzz.
    Once the trader has a profitable system and keeps following the rules, without the sort of awareness that your article highlights, the danger is the trader gets bored and wants to start tweaking the system, or look for another one to play with.
    And this is not what consistently successful trading is all about!
    I have to ask, what understanding has James now come to in his method of trading?
    Perhaps this was James’ way of ‘knowing himself’, by testing the various time frame systems to see what system best suited his lifestyle and personality.(Although he didn’t seem to recognize that possibility).
    How else can you make a decision in such a unique and unfamiliar business like trading?
    Please don’t keep us too long in suspense on your follow up rule – “Forget Yourself”

    • Hello Greame,

      Funny comment on tempting you to go coach polygamy :-)

      Perhaps I’m doing an ok job after all.

      Yes, good point about boredom. This work can definitely be a challenge, have a buzz, etc, but trading after a while can be pretty boring in some aspects. I always find a challenge in it, but at the same time, one trade is not much different then the other and you do that 1000’s of times, and it definitely changes flavor.

      But I agree, when people get bored is when their bugaboos come out and its important to always keep the discipline and focus. Just like most accidents occur close to home, its the same for trading.

      In terms of James’s process, he’s coming along and getting more particular about what he wants so its moving in the right direction.

      But sometimes we have to go through this process to find out what we really want.

      Good comments for sure so thanks for sharing.

      Kind Regards,
      Chris

  • Dimitri

    Hello Chris,

    Great article my friend and this couldn’t have hit at a better time in my life. Too coincidental that is. My name in English is James and the book I decided to read after a few years of owning it is called “Your Own Worst Enemy”. This person named “James” is ripe for this reading and as well you as an educator would like it too. The universe works in mysterious ways as I hadn’t read one of your articles in a couple of months, hence my own worst enemy, and said to myself I have the time to read this as they are always informative.

    Thanks again for the message at a perfect time. Are you hanging out with Paulo Coelho or something down there? LOL. Have a great one.

  • al

    Really, really great article !

    • Hello Al,

      Glad you liked it.

      Kind Regards,
      Chris

  • Richard

    Hi Chris

    Excellent article and one, which I can very much identify with. It’s taken me a long time to fully appreciate the truth of many of the points you make! I recently read Sun Tzu’s, “ The Art of War.” His central message is basically, “know your enemy, know yourself.” There are numerous examples, given by commentators over the centuries, of military forces who were beaten by adversaries far fewer in number but equipped with a thorough understanding not just of their enemy but themselves as well. The Japanese movie, Seven Samurai is an excellent example of Sun Tzu’s philosophy at work.

    I personally found the parallels with trading remarkable and came to the conclusion that while I had done an admirable job learning many of your methods, I was bound to continue to fail unless I acknowledged a number of things about myself which were holding me back; in particular, the need to be thoroughly organised and focused in what I’m doing as well as honest with myself about the time I have available in my life to trade. I’m seeing trading now far more as a business and am approaching it as such which has meant having to get my head round a whole load of stuff I’ve spent much of my life avoiding such as keeping really accurate records, collecting data, analysing it and writing a journal etc. I think I was initially so obsessed with methods and whether they had an edge, I completely overlooked much of the other stuff. Fortunately, your articles have really helped me to gradually see the bigger picture!

    Regards

    Richard

  • Rahulsinh

    Hi Chris,

    You have been wonderful all the time, I have learnt lot from your articles and the videos on your website. I need to admit that you have an simple yet effective way of teaching and making people understand what trading is. Hope to see more motivational and valued articles from you.

    God Bless You
    Regards
    Rahulsinh G. Thakore

  • Emily

    Hurrah! At last I got a web site from where I be capable of genuinely get
    useful facts concerning my forex price action training and knowledge.

  • Aquila Heman

    Great article Mr Chris, its really reminds me to think who am I? and what I need to be a real me, + good , profitable and eventually full time trader.