Rules Based Trading Strategies: What are they and why should you care?
Plain and simple, when it comes to information/opinions, market participants are subjected to 'informational overload'.
Through out each day, we are bombarded with financial data and conflicting opinions as to what it all means for the future course of market direction.
One 'expert' recommends selling a particular stock because it's overvalued while the next recommends buying the same stock because it's cheap compared to its future earnings potential. They both can't be right. Can we pierce the vale of confusion?
The problem with this approach to investing is that it's based on trying to predict the future.
Guess what? No one has ever figured out how to consistently predict the future. If they could, wouldn't they trade for their own account and become rich? For sure, they wouldn't be shoveling all that money into your account!
That's the bad news. The good news is that you don't have to. You cannot predict the future but you can make money!
The first thing is to recognize that emotional based decision making is a trader/ investor's worst enemy. "We have met the enemy and he is us!"
Emotions, specifically fear and greed get in the way of sound judgment. In this age of instant information, it is possible for traders to experience both fear and greed at the exact same moment.
If you are to have any chance at successful investing, you must find a way to eliminate (or at least control) these two most powerful emotions in the investing world.
Rules based trading strategies are designed to do exactly that. They are decision-making systems.
Rather than basing decisions on emotional 'gut feelings', rules based trading systems are based on logical algorithms evolved over a long history of what works and what doesn't.
Not just rules for cutting losses short and letting profits run, but also sound rules for initiating positions, adding to positions, and when to exit positions.
Jesse Livermore, perhaps the world's greatest trader ever, has said, "When I have to depend on 'hope' in a trade, I get out of it." And, "Whenever I've gotten into trouble, it was because I didn't follow my own 'rules'."
Need I say more?
What are your thoughts on this subject? Share them!
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