Matching Strategy with Psychology: Why Forex Traders Like to Break the Rules

trading strategy

An important step when creating and/or using a developed strategy, is to check whether the trading system matches the trading psychology.

Some might be wondering: why on earth is this important for trading?

The answer is simple…

Forex traders LOVE to break rules!

All Forex traders are rule breakers – or have been rule breakers in the past.

Apparently it is much easier to break rules than follow them – more on that later. First let’s discuss what constitutes a break of the rules.

DISCRETIONARY VS RULE BASED

There is a difference between 100% rule based strategies and trading systems which allow traders to make discretionary decisions.

With rules-based systems, each step of the trade setup has non-negotiable rules. If any part of the strategy is not implemented, then this immediately and automatically translates into a break of the rules. The advantage of these systems is that it is very simple to measure whether the trader has implemented the rules correctly. The disadvantage is that the strategy does not allow for any flexibility or adjustment to market conditions.

Discretionary systems also have rules, but there are parts of the trade setup in which traders can make a choice per trade. Basically, these systems allow a trader to choose from a number of options during the trade setup and thereby adjust to market conditions. They are able to make those discretionary decisions but without breaking the rules. Discretionary decisions however usually still have certain guidelines or rules connected to it and discretionary systems usually limit the number of options to a reasonable amount.

For instance, a rule could be to trade a deep Fibonacci retracement level, but the discretionary decision would be to choose the exact Fibonacci level per trade setup. Thus if a trader once chooses the 50% Fibonacci and another time the 61.8%, then this is OK and no rules have been broken.

WHY MATCH PSYCHOLOGY?

The reason why Forex traders break the rules so often can be explained by the mismatch between their trading psychology and trading strategy…

If a Forex trader is implementing rules which are inherently “going against” their outlook of the market and their analysis of price, then no wonder the rules are broken.

path of least resistance

Everything and everyone chooses the path of least resistance. When water flows from the mountain it does not break through stones, it goes around it. It naturally chooses the path of least resistance. Price does the same. When price hits major support or resistance, the path of least resistance dictates that there is a high chance price will “respect” that level and make a retracement.

The same principle is valid for Forex traders. If it’s easier to break the rules than follow them, then Forex traders will do so. Of course, we can beat ourselves up for breaking the rules. And we might succeed for a while in following those rules. Ultimately failure of implementation is luring around every corner and at one point the mounting pressure will lead to a rule break.

That is why it is important to set up rules that match our psychology. Forex traders want to create rules that are easier to follow than to break. This is the way traders create a natural and sustainable flow of correct strategy implementation (and thereby avoid breaking of their trading rules).

Many Forex traders refer to the fact that Forex trading is simple, but not easy. Now you know why. Trading might be simple in its nature, but it is NOT easy because breaking the rules IS easy.

OPTIMIZING PSYCHOLOGY & STRATEGY

One of the best methods to figure out whether psychology and strategy are indeed aligned is by evaluating one’s own trading. Here is a checklist:

  1. A trader needs to comprehend what part of the trading plan was not implemented as per plan. Those are usually the weak spots of a trader.
  2. A trader needs to judge whether this was a one-time error or a repetitive error.
  3. In case it was a one-time error then usually this was just an incident. Try to analyze how future mistakes can be avoided.
  4. In case it was a repetitive rule break, don’t beat yourself up but instead work on understanding why they have been broken.
  5. In these cases the trader needs to re-evaluate their rules and strategy and analyze which parts needs to be altered so that the new rules are indeed in sync with the psychology.

Another preventive tool that can help with this process is making a “strength and weakness” analysis of oneself, the Forex trader. By identifying those items a trader is able to comprehend what style, indicators, tools, time frames, discretion, etc are best suited.

Remember that evaluations are always measuring two points:

  1. The effectiveness of the trading strategy
  2. The implementation of the trading strategy by the trader

If Forex traders break rules, then measuring point one, the effectiveness of the trading strategy becomes impossible because the results are skewed due to the weak implementation of the trader.

DTT HAS BUILT IN OPTIONS

Our Double Trend Trap (DTT) strategy has built in options for traders so that they can trade in sync with their own psychology.

The DTT allows traders to trade both break outs and/or pullbacks. By doing so, a trader can choose which strategy is best in sync with their own trading psychology. Some traders love the breakouts; whereas others prefer the pullback. In the Forex market there is not a right or wrong way; only profitable or non-profitable. The DTT offers YOU the choice of which strategy is more in sync with YOU.

The DTT also has multiple ways of exiting and trade management. It allows traders to aim for a take profit level, but also allows for the usage of trail stop losses.

The DTT allows traders to use trend lines and/or our custom-made trigger candle. Via this way mechanical traders can focus on trigger candles and discretionary trades can focus on mechanical trend lines.

The DTT allows traders to use various entry methods such as close of the trigger candle, the retracement, the breakout of tops & bottoms, and the pullback to the Fibonacci levels.

The DTT made sure that the strategy is flexible so that traders can match their psychology with it. Check out our DTT strategy here.

How do you think you can improve your strategy?

Can you make the strategy and psychology more aligned?

Any sharing of this article is of course always appreciated! Happy Trading!

 

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Winners Edge Trading was founded in 2009 and is working to create the most current and useful Forex information and training available on the internet.

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