Each trader has different trading rules, and they apply them or are allowed to modify them in different ways. In this article, I discuss when, why, and how I am allowed to modify my trading rules. This is my view. Take what you like and leave the rest.

Basically, a trading rule is not necessarily forever. As we gain experience or find better ways of doing things, the rules get updated to reflect that.

I think many new traders get stuck at the same level, never making headway, because they don’t allow themselves to grow. They learn some rules for a strategy and think they are doing themselves a service by never questioning or trying to improve on those rules. They may even jump from strategy to strategy or book/course to book/course (mistakenly thinking this is growth), but they never make headway with any given one because they don’t dive deep into how they could improve their own performance with each one.

This is why in each one of my courses I have a section that discusses how to improve on YOUR OWN trades. It is so important. It is only by looking at our own trades and seeing how we could have improved on them that we stand a chance of actually improving our performance.

What Are Trading Rules?

Trading rules outline how we trade. Even more basic than that, trading rules allow us to assess what is working.

Think about that for a second. A trading rule’s primary function is to assess what is working. “Working” means the results are acceptable to you, so you get to define what working means. Some people might want huge returns, others just want a little side income, others want to have an income stream with minimal work possible. These people rules will be different, and what they view as “working” will be different.

Our rules lay out how we will trade. This allows us to see if that way of trading is profitable for us. If we followed the rules and it didn’t work, maybe we need more rules, or fewer rules, or different rules. The rules allow us to test a specific way of trading for profitability.

Without rules, we are just taking random trades and it will be hard to determine what works. Rules allow us to fine-tune.

Keep in mind, the rules may work, but you can’t follow them. That isn’t the rule’s fault necessarily. We can work on improving our psychology and “work up to” those profitable rules starting from where we are at now (discussed more later on).

In this light, trading rules should not be static over time. It is likely you will find better ways of doing things over time, even if it is slight changes. Your life may also change. You may not be able to trade at the same time of day anymore due to moving or family commitments. That may require some rule changes (time of day you can trade, possibly even the market you can trade, for example).

Check out this Trading Practice Software that lets you practice any time by downloading historical data and replaying it as if it were live.

The Same Trading Rules May Not Work For Everyone

Two traders attempting to follow the same rules will have very different results over time.

It seems ridiculous, but slight differences in entries, exits, risk tolerance, and behavioral differences add up over time.

Even if both traders think they followed the rules, they will have different results.

Our brains interpret patterns differently. I had a friend at the trading firm I traded at and we almost always ended up in opposite positions despite looking for the same patterns, yet we both did very well. We managed our risk when we were wrong and made up for it when we were right. Also, in real life, we miss trades and make mistakes. The more mistakes, the greater the divergence in performance between someone who makes fewer mistakes.

You can’t trade exactly like someone else. You are not them. So don’t try. Take what you like or what you can learn from them and make it your own (create rules, trade, refine rules, trade, refine rules, trade…more on this in a bit).

How, Why and When Trading Rules Can (and Should) Change

Trading rules are much more dynamic than people think. Trading rules are viewed in a very limited way. “If this pattern forms, I buy at this point with a stop loss and target at X and Y” is how most people view a trading rule. And yes, that is an ok starting point. But then you can add in rules for:

• Situations where you can use a smaller stop loss
• Situations where you can use a bigger target or trailing stop loss
• When position size gets altered
• Daily, weekly, and monthly risk management rules (stop trading for a set period if X amount is lost)
• Which “contexts” the pattern work in (take those) and in which contexts the pattern performs unprofitability (eliminate those trades)
• Waiting or being more aggressive on getting into trades depending on YOUR tendency (too early or too late)
• Not trading if not in the right mental state, even if there is a valid setup
• What do you do if you are in a trade already and find you are not in the right mental state?
• Not trading at a certain time of day (because unprofitable), or only trading at a certain time of day (because highly profitable)
• and the list goes on…

These are just a few examples of how we could alter a basic strategy (entry and exit rules). And of course these changes will affect performance.

Over time, if we are documenting what is working for us and what isn’t (part of taking your trading to the next level) then we will find a steady stream of improvements we can make.

You may notice that depending on how you modify, delete, or add rules, you could end up not trading at all when conditions aren’t right. Or you could add in other strategies to try to make money during times when another strategy doesn’t do well. Up to you and how you want to trade.

The above examples also include potential rules related to market conditions and our mental state. We need to factor for market conditions as well as mental conditions. Both these things affect performance so have rules for how you will handle different market conditions and different mental states.

Don’t change your rules every trade based on the result of that trade! Rather look at your trades over time, and see if you can spot better ways of doing things. If you notice something, test it out to see if it is more profitable than what you did. If it is, incorporate it by including that information in your rules.

My Complete Method Stock Swing Trading Course guides you through a complete method for swing trading explosive stocks. Take what you like and create your own rules around it, and leave what doesn’t suit you.

Ideal Trading Rules Versus Where You Are At

Maybe you read about a strategy and it sounds awesome. You do go implement it and YOU can’t do it. Your current mental state or skill level just doesn’t allow for it.

For example, a strategy may call for a target at 2.5x your risk or 2.5R. But waiting for a profit target to be hit takes time. You are watching the price move up and down after entry. You may find you simply don’t have the patience. Once the trade is showing a small profit you can’t handle the possibility of that trading turning into a loss, and so you close the trade.

You aren’t ready for a 2.5R target yet, but based on your research you know you want to get there. So start where you are at. Maybe you decide a 1R target is manageable. That means if you were willing to lose $100 on the trade, you will take your profit at $100 as well. Input whatever risk amount you are comfortable with.

This is your current rule, but you can also create rules for expanding your comfort zone and moving toward your goal of 2.5R. Set up a rule where after X number of trades, or a specific time frame, you increase your profit target to 1.1R. Then do the same thing again at the next interval, up to 1.2R.

Notice the small increases. Obviously, you can’t make the big leap to 2.5R, so don’t waste energy trying. You tried it, and you couldn’t follow the rule. You’ll just frustrate yourself and likely quit to try something else “easier.” But you will always end up facing the same problem. Face the problem, and schedule out how you will overcome it, incrementally.

What About Automated Trading?

Don’t automated traders keep their rules the same?

Some may for a time. But they too can learn from their results and improve their rules over time. Many of these advanced algorithmic traders have adaptability built into the programs/rules they are running. Adaptability is just different rules for different conditions.

And I think this is where people get tripped up. They think a trading rule is never deviated from. And that is true, ideally. We should follow our trading rules. BUT we can change a rule to a different one if we find a different one works better!

We, just like an algorithmic trading program, follow the rules. But rules change with experience. Over time, this means our trading may end up looking a little different (or a lot in some cases) from where it started.

Remember, trading rules are to test what is working. Sometimes a set of rules stops working and they produce heavy losses. This means the rules may need to be updated (if the losses are outside what has been tested for), or you need to look why the losses are happening and create rules to avoid that situation where your strategy doesn’t perform well.

On the flip side of the automated discussion is Intuition in trading. Intuition can have a place in trading, because it is simply picking up on things we have repeatedly seen but haven’t fully realized yet. That said, there should still be rules around how we use intuition. For example, if I get a bad feeling during a trade, I am allowed to put an aggressive trailing stop loss on it. I am using my intuition, but also following my rules.

My Price Action Stock Day Trading Course covers which stocks to trade, the type of movement you are looking for to maximize your chance of successful trades, and situations where you want to avoid taking trades. Find high-quality trades in less than 30 minutes a day.

Sound Complicated? Simplify It…

When I trade I am not going through a list of hundreds of rules to determine if I can take trade or sit on my hands.

I have basic patterns I like to trade.

Sometimes a pattern looks a certain way and I noticed that my results aren’t as good. So I skip those ones now.

Sometimes a pattern looks a certain way and my results tend to be really good with that “look,” so I definitely want to take those.

My strategies have a general place to put the stop loss and target. A few strategies utilize a trailing stop loss.

Generally I stick to these, but if I notice price isn’t moving as much and thus may have a hard time reaching a big target, I am allowed to reduce it. Maybe price is making huge moves recently; I can go for a bigger target.

If I get anxious during a trade, or unsure about something, I can use a trailing stop loss or exit right away (because if I am not in a good trading mind frame, I will probably mess it up anyway).

Then I have my basic rules such as my position size and time of day and markets I can trade.

I write notes about my trades so that I can review my decision making, and work on problem areas if needed. I can check if my way of doing things is “working.”

When starting out, it may seem like a lot. But remember, trade from where you are at. Trade what you know, and then look at your last 20 trades or so. Find little ways to improve. Incorporate. Slowly over time you are noticing tiny details, and they make a big difference in performance.

In my courses, I discuss loads of tiny things to watch for. When starting out maybe you can’t watch for them all, but you can watch for a few of them. Once comfortable with those, find or include a few more little things to watch for. It may not seem like you are following the ideal strategy, but you are following your rules, and working towards implementing more profitable rules as you become capable of executing them.

Over time, your rules become more stable because you have experienced many different things and your rules already account for how you will handle those various situations.

Final Word on Trading Rules

Trading rules are not some external thing that others can bestow on us to make us magically profitable. We each need to take responsibility for the trading rules we are following. Trading rules can be contextual, adaptive, and should change when we find better ways of doing things.

Remember trading rules are a way to assess performance. If performance isn’t there, something needs to change. Continuing to use the exact same rules probably isn’t going to make things better. Look at your trades and how you can improve them. You don’t need any other knowledge for this. If you want some things to consider when looking at your own trades, see How to Create (and improve) Your Own Trading Strategy.

If this sounds like a lot of work, and you don’t like having to potentially adjust your rules over time, then you can passively invest and make 10% per year. Just buy ETF index funds. That said, even with that you need to decide how and when you buy them, how long you will hold them, and how you will ultimately dispose of them in retirement. But that is a lot less thinking than what trading involves.

Want to learn how to swing trade currencies, including strategies, and how to adapt to changing market conditions? Check out the Forex Swing Trading Course.

Cory Mitchell, CMT

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage. The author is not a psychologist, and the article should not be considered mental or health advice.