[This is part of the series: 9 Rules On How To Become A Trader]
Rule # 5 on being a profitable trader: Do Not Listen To Your Gut.
I am not even sure anymore exactly what 100% discretionary trading means.
Does it mean just “listening to your gut?”
Trading based on “how the market feels?”
Or, is discretionary trading simply a reference to trading the market using fundamentals?
Who knows for sure.
All that can be certain is that the first two examples above come across as total nonsense.
I mean, can you imagine being interviewed by a trading firm for a trading position with that kind of thinking:
“Thanks for joining us Mr. Smith. Let’s just jump right in. Can you tell us what your trading philosophy is.”
“I don’t really have one – exactly.”
“You don’t have a way in which you trade?”
“Not really. I mean, whatever feels right. I like to get a feel for the market and just go with my instincts.”
“So given certain market conditions, Mr. Smith, there is no telling what you may, or may not, do? You will simply act as you see fit?”
“That is correct.”
Can you imagine what a joke an interview like that would be? They would laugh you out of the building.
Discretionary trading using fundamentals seems better, but couldn’t a trading formula still be used in a systematic way using fundamentals?
For example: “We are only interested in investing in companies with, a Price/Earnings ratio below X, a Price/Earnings-Growth ratio below Y, a Debt/Equity ratio below Z, etc.”
A trading rule like that seems to take most of the discretion out of a fundamental investing decision.
Most of the problem “trading your gut” is not, however, a function of the type of trading rules or trading system you follow.
Most problems arise when people simply abandon their trading systems under stressful draw-downs.
A few losses pile up and suddenly you have entered half a dozen buy and sell orders based on emotion.
The only way you should ever abandon your trading system is to sit on the sidelines.
If the markets are killing you for some reason, get out! Take a breath and re-evaluate everything. And live to trade another day.
The point is: Backtest your system. And trade your system.
Trading based on your emotions – or gut – is a quick ticket out of the trading business.