Sergeant Friday on the 1950s television drama “Dragnet” was fond of sticking to “just the facts.” Many police officers look at the world from a strict rule-oriented point of view. Rules are rules, and unless you follow them all the time, you are committing a crime. It is necessary, for example, to stop at a stop sign, even if you are in the middle of the desert and the nearest other car is 10 miles away. Perhaps a strict adherence to the rules is necessary to keep law and order, but the world is rarely that simple or clear cut.
Rules are arbitrary, and the only way that rules can influence people’s behaviour is when all members of a group decide that they should follow the rules. Many novice traders make the mistake of thinking that trading can be broken down into clear-cut rules and universal laws, but market participants don’t always follow a set of rules, so their behaviour is far from predictable. You have to settle for using your intuition and making an educated guess as to what they are going to do next.
It may be useful to outline a specific trading plan in terms of entrance and exit strategies, but it’s necessary to realize that rules are arbitrary in the end. They are nothing more than guidelines. It is important to stick to your trading plan as if they are rules to follow, but it’s important to restrict rule-following to when you execute and monitor a trade. When you are devising a trading plan, it’s useful to realize that the markets don’t behave according to any universal laws. History only repeats itself in the markets when it does, so universal rules may not always apply. Don’t be an ultra-conformist that tries to follow the rules too blindly. Trading requires that you learn to go your own way, allowing your personal intuition to guide you.
All humans have a natural tendency to pay attention to rules and to conform. There are safety and comfort in numbers. As the human race developed, it learned that its survival depended on banding together and working as a group. That meant looking toward others for guidance, and it also meant following the rules of the group. All humans inherited this legacy, and it is shown in the security we feel when we follow the crowd. It’s adaptive most of the time. Although there may be vast individual differences on the extent to which people follow the crowd, with some conforming too much and others conforming too little, most successful members of society have seen the virtues in following the crowd. Blind obedience to authority may not be beneficial but compromise is.
To be successful, it is vital to protect one’s self-interests yet also stay within the bounds of acceptable behaviour. It is also important, though, to develop a clear and solid sense of personal values and to develop a clearly defined personal identity. Such a clearly defined view of yourself allows you to be self-sufficient, and go your own way when necessary. Such flexibility and open-mindedness is vital for success as a trader. You can’t be such a rigid rule-follower since universal rules to follow are rare.
If you are a short-term trader, you are trying to profit from volatility, and hoping to make a big profit. Most of the time that means going your own way. It requires that you occasionally think like a contrarian, guessing what the crowd will do next, and anticipating how the movement of the masses can benefit you as a trader. The challenge is to know when to follow the crowd and when to go against it. The crowd is usually right until the general market trend turns. When virtually everyone has taken the position that the market is headed in a particular direction, there are few traders left to push the trend further.
At that point, a countertrend initiates and moves the market in the opposite direction. The challenge is predicting when that turning point will occur, anticipating it, and developing a trading plan to capitalize on it. This is where intuition comes in. There are no clear-cut rules. You have to creatively and freely assess the situation and go your own way. It may take a strong sense of courage and unwavering confidence, but trusting your intuition and going your own way is the only path toward success as a short term trader.