Traders Ask: Must I Always Follow My Trading Rules?

Question:
Mike,

Hope you enjoyed an excellent holiday weekend! I spent a lot of time this weekend thinking about a trade from Friday and whether or not I should continue to make this trade – I am curious what your reaction would be if one of your guys did this.

In the AM, I noticed the NYSE-TICK opened strong but was quickly weakening along with the ES starting to close the gap. I was watching JOYG which was/is in a clear 30-min UP-TREND. One of my rules is to always align my trades in the direction of the 30-min Trend. On this day however, I saw something on the tape that I just couldn’t pass up. I noticed JOYG moving up from 63.20’s up to 64. It was printing anywhere from 800 to 2K every cent. All of a sudden, a seller swallowed about 25K at 64. This got me excited, but I remembered my rule (dont short strong 30-min up trends). Price rejected off 64 and moved down to around .68 and then revisited while printing around 3K every cent on the way back up towards 64. At 64 – the seller swallowed another 30K!! The offer could not lift. I offered and got filled at .97. I calculated a 3 to 1 reward/risk trade and my target bid got hit for a modest profit. Was I happy about this? Not exactly. I still feel uneasy about shorting this 30-min trend…I broke my rule because something on the tape screamed out at me like an enticing Katrina Kaif (bollywood) motioning me with her finger to come join her at her table with that wicked smile of hers…. I’ve thought about this trade all weekend (and Katrina K. of course!) – should I adjust my trend rule – add an if/then statement – or should I just stick to this rule in the future and pass on this trade? I asked myself what would happen If I did this trade a 1000 times. The truth is – I don’t know. I haven’t done this trade (fade strong 30-min up trend + larger seller) enough to know the stats.

As I think about this at my desk this evening over a cup of freshly ground Guatemalan coffee I find myself curious – what would Mike B. tell one of his guys if they pulled this trade on Friday. Would he rip into him and tell him to follow his damn rules and have discipline? Would he tell him to trade it with small size and compile more stats? Or would he tell him to make adjustments to his rules? Or perhaps something else – What would you advise Mike?

As always – your generous work has made a tremendous impact on my work ethic and process and as a result – my P&L. Thank you again!

Bella Resonds

Most excellent question. The skill to setting the scene left this writer impressed. And hence I stand ready to answer.

As you gain experience your trading rules should develop more nuance. I love the rule of not fighting the trend. But I love even more your willingness to add a caveat. Doing this will make your trading more consistent. It is a good rule not to fight the trend. it is a better rule not to fight the trend, save this very specific set ups or this ulta specific trade. That is the thinking of a pro trader.

You are not breaking your rules here. You are making them more nuanced and malleable which is the code of the experienced trader. You are seeing something very unique. What you see is clear and distinct. You wish to act on this information and not be some unthinking robot. This can offer a very nice countertrend opportunity. Make sure you determine that this specific countertrend trade is now part of your playbook before you make this trade. If you do not then you are violating your rules which is not in your self interest.

Please measure these exception trades to make sure they are worth your while. Please consider whether you are missing the big trade by catching the fade. And if you are even if your win rate is excellent with your fade trade it may not be worth your time. If you fade the fig for a fifty cent downmove, but miss building a position for the two point next explosive up then you will want to eliminate this nuance to your trading.

Great job working on your game!

Mike Bellafiore
Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Wiley Trading)

One Comment on “Traders Ask: Must I Always Follow My Trading Rules?”

  1. Be careful. You can only have ONE exception to any rule.

    Once you have more than one, you no longer have “exceptions” … you have A NEW RULE TO FOLLOW.

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