I’ve read a few option books.
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Friday, April 11, 2008

Follow Your Trading System

Previously, we have discussed the important components of a trading system.

When you have built or found a trading system that suits you, it is recommended that you test the trading system through paper / virtual trading before you trade it using real money.

Once you’ve had a proven & tested, profitable trading system, you yourself & your discipline will be the key determinant whether the system will be a success and a failure. Successful traders are those who are psychologically prepared and have the discipline to stick with their system through good times and bad times. You can never reach your goal as a trader if you can’t maintain the self-discipline to trust and stick to the rules you’ve chosen.
Follow the rules of your system, no matter what your emotions are telling you.

Mark Douglas, the author of The Disciplined Trader: Developing Winning Attitudes suggested:

As a trader it is more important to know that you will always follow your rules than it is to make money, because whatever money you make, you will inevitably lose back to the markets if you can't follow your rules.

Dr. Alexander Elder in his book, Come Into My Trading Room: A Complete Guide to Trading, also suggested likewise, as discussed in this post.

However, there is a caveat to this concept. You need to have a proven & tested trading system with a positive expectancy (average gains higher than average losses) which will produce a positive expected return over the long term.
If your system has a negative expectancy (not profitable over the long term), then sticking to your system would only lead you to your ruin. That’s why it’s also important to always monitor your trading performance over time. That’s where trading journal plays an essential role.
Sticking to your system doesn’t mean you cannot refine it.
As what Trader X suggested:

Don’t jump from strategy to strategy, timeframe to timeframe - pick something and stick with it! That does not mean you cannot refine it - you SHOULD constantly refine and improve what you do. But that is different from changing things completely.

Related Posts:
* Why Trading Psychology Is Very Important
* Why Being Right In Your Trading Does Not Necessarily Mean Making Money
* The Psychological Need To Be Right vs. Making Money
* The Fear Of Losing Money

You might also be interested in the following topics:
* Learning Candlestick Charts
* Learning Charts Patterns
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

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