Trading by Rules - Trading by Rules: A Psychological...

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Trading by Rules: A Psychological Perspective Brett N. Steenbarger, Ph.D. The following was written in October, 2003 for Rickey Cheung’s trading system website ( ). If I had to give one piece of advice to most traders who are struggling with their P/L, it would be to trade tested systems or patterns and trade them systematically. If you look at highly successful business organizations, such as McDonald’s, Dell, Federal Express, or Wal-Mart, you’ll find companies that are doing the same thing, the same way, every day, with a high degree of consistency. They came up with a winning formula, which is half the battle, but they execute that formula with high fidelity and regularity. That is how you want to be trading. So that brings up two important questions for any trader’s self-assessment: Do I have a winning formula, and have I really tested it to know it’s winning and to have the needed confidence in it? Am I executing my formula faithfully, and am I truly tracking each and every trade to know I’m following the formula and have the confidence in my ability to follow it? A very large percentage of traders who have contacted me for assistance with their trading cannot honestly answer these questions in the affirmative. They want help for their psyches when what they need is to treat their trading like a world-class business.
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Trading and Personality About three years ago, Linda Raschke and I surveyed a group of approximately 64 active traders. We were interested in discovering whether there were any personality traits and coping styles that distinguished more successful traders from less successful ones. We obtained a number of thought-provoking findings. For example, we discovered that the winning traders tended to have lower levels of neuroticism (negative emotional experience) than their less successful counterparts. They also employed more problem-based coping methods (coping by developing strategies for dealing with threatening situations) relative to emotion-focused coping devices (coping by venting feelings or seeking support). Profitable traders, we found, scored higher on a trait called Conscientiousness, reflecting a general stick-to-it-iveness and motivation to follow through on plans and commitments. In all, these findings confirmed what many of us have observed informally in our careers in the markets: traders who temper their emotions and stick with trading plans fare better than their more emotional and impulsive peers. One unexpected finding from our survey, however, was that a disproportionate number of the successful traders—about half—reported utilizing mechanical trading systems. Of the unsuccessful traders, none were mechanical traders. When I subsequently interviewed the successful traders, it turned out that even the ones that were not systems traders were basing their trades on patterns that they had carefully researched. Conversely, almost to a person, the unsuccessful traders lacked such
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This note was uploaded on 10/21/2010 for the course BUSINESS 19450 taught by Professor Goldberg during the Fall '10 term at Saddleback.

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Trading by Rules - Trading by Rules: A Psychological...

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