Rules Make Money

Last week I told you how I have a tendency to get sloppy when I'm on a winning streak, which hurts my consistency as a trader.  I start to break my rules and lose discipline, which I need to work on if I want to be successful over the long term.

To illustrate the importance of following trading rules at all times, here are a couple charts of what my trade performance would've been had I remained disciplined over time, versus the addition of the myriad of times where I've broken my trading rules.

I use TradePerformance Lite to track my trading performance over time.  The great thing about it is that you can classify every single trade according to a particular trading strategy (hey, Tim Sykes, you need to add this capability to profit.ly!).  I have been using this to track the performance of various trading strategies over time.  I keep the strategies that are winners, and dump the strategies that are inconsistent.  For me to consider a strategy as a winner, it needs to have at least a 60% winning trade rate, and a profit-to-loss ratio of at least 2.

If I screw up and break my trading rules, a trade goes into the "Bad Trading Choice" or "Misplay" categories.  Thus, I can gain awareness of how much breaking the rules has cost me over time.

And it's cost me a lot.

Here's a chart of what my trade performance would have been had I consistently followed my rules, using the winning strategies I described above (this chart does not include strategies that I experimented with and found not to meet my criteria).

The above chart represents a 70% winning trade rate and a P/L ratio of 3.35.

Now, here's the same chart, but now with all of the trades where I broke my rules thrown in.

Talk about a huge difference.  The winning trade rate goes down to 48%, and the P/L ratio goes down to 1.21.

The bottom line is discipline and rules make you money.  I've decided to put these charts up as backgrounds on my monitors, as a constant reminder of how much breaking my rules can cost me.