In Defense of Rules

This week has been pretty typical in my option trades, but I had some time to reflect this evening on something that I think is crucial to consistently profitable trading.  I've talked about Rules for Trading many times, but once again I would like to wax on about the importance of a well defined trading model.  Don't get me wrong.  There are many people with the market insight, time, and accurate intuition to be successful discretionary traders, but the for the SnapTrader a well defined rules-based approach has many benefits.

This weeks I became especially tuned into this.  It was a nicely profitable week, YET I didn't make a single trade.  That's right... not a single trade... and yet it was a fairly active week.  The DOW was up over 200 points on Monday; then down four days in a row, giving it all back; and ended the week virtually flat with the Monday open!  And in all that craziness I just sat back, collected time premium, and did nothing.  So bear with me while I extol the virtues of having strict, well-defined rules to follow:

• It takes less time:  Having a well defined set of rules means that you don't ever have to agonize over a decision, or spend time doing research to figure out whether to pull the trigger on a trade.  Either the rule says "trade" or not.  And when it does indicate a change, the well defined rule will tell you exactly what to do.
• It lowers stress:  In spite of the wild swings in the market this week, it was relatively stress free.  Very little thought goes into managing a trade once the rules are established.  And by having a set of time-tested rules, the trader knows that they work.  Therefore you can trade with confidence and a lot less worry... even in the face of volatility.
• It reduces over-trading:  It's a well known drawback of discretionary trading... all but the very best have a tendency to over-trade.  Whipsaws, extra commissions, and slippage are the penalties the market places on too much trading.  By having a well defined set of rules, the trader knows that the trade is worth the cost.
• It's just the way it's done.  Again, aside from a handful of very talented individuals, systematic trading is the way the pros do it.  The Turtles, the big hedge fund managers, and many others rely on an approach this is well defined and proven.

Below I share with you the profit graph of my total RUT position.  It moved around a lot this week, but in the end I followed the rules, made NO trades, and it was nicely profitable.  Next week I will begin unwinding this beast and locking in the gains, ready to start again in a couple of weeks for next month.

Do I always follow the rules?  Uh... no.  I make a lot of mistakes.  But when I do I love it when it works out.  Becoming a good trader is more about following your plan than it is about being profitable.  Being profitable without a plan isn't sustainable for most people, following a plan (a good one of course) is the only way.

Good Trading...