Trading Psychology · Intermediate · 5 min
Following your rules when it hurts
You can explain why a kept rule can lose and a broken rule can win, and why judging single outcomes leads to worse habits.
Just this once?
The price is creeping toward your stop. The chart looks as if it might turn any second. Every part of you wants to move the stop a little lower, just this once.
Writing rules is easy. Keeping them when a trade hurts is the hard part, and it is where much of trading psychology really happens. This lesson explains why rules feel wrong exactly when they matter.
Judge the process
A trading rule is a decision made in advance, when you are calm: where to enter, where to exit if wrong, how much to risk. Rules exist because decisions made during a trade are colored by fear, hope and the pain of a loss.
But rules do not win every time. That is what makes them hard to follow:
- A kept rule can lose. Your stop is hit, and then the price turns in your favor. It feels as if the rule cost you money.
- A broken rule can win. You move the stop, the trade recovers, and you feel smart.
The second case is the more dangerous one. The good result rewards the broken rule, so you are more likely to break it again. And habits are repeated until the case where they fail badly.
Psychologists call this outcome bias: judging a decision by its result rather than by the information and reasoning behind it. In experiments by Jonathan Baron and John Hershey in 1988, people rated the very same decision as better thinking when it turned out well than when it turned out badly. They did this even though they felt they should not consider outcomes.
In trading, single results are mostly noise. A rule can only be judged over many trades. That is why the question after each trade is not "did I win?" but "did I follow my plan?". A trade that followed the plan and lost is a good trade. A trade that broke the plan and won is a warning.
Two saves, one disaster
A fictional trader risks 100 per trade with a fixed stop.
- In March, a trade nears its stop. The trader moves it lower, and the price recovers. A loss of 100 was "saved".
- In April, the same thing happens. Another 100 "saved".
- In May, the trader moves the stop again. This time the price keeps falling. The trader finally exits at a loss of 650.
The two saves were worth 200. The one disaster cost 550 more than the planned loss. Over three trades, breaking the rule cost 350. Without the two lucky saves, the trader would never have built the habit that caused the large loss.
Common mistakes
- Rating trades by profit only. Rate them by whether you followed the plan.
- Changing rules during a trade. Changes belong in a calm review, not in a losing position.
- Abandoning a rule after a few losses. A handful of trades is too few to judge.
- Rules too vague to follow. "Exit if it looks weak" is not a rule. A price level is.
The takeaway
A good rule can lose and a broken rule can win. Judge your process over many trades, not one outcome.
Check yourself
Quick quiz
4 questions. Instant feedback, nothing is saved.
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1Tap the trade that is more dangerous for your long-term results.
Tap the chart.
A broken rule that wins rewards the break, which makes it more likely to happen again, including when it does not work out.
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2What is outcome bias?
Baron and Hershey found that people rate the same decision as better when it happens to turn out well.
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3You moved your stop and the trade recovered. What is the most useful conclusion?
One good outcome says little. Over many trades, moving stops tends to turn small planned losses into large unplanned ones.
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4When is it reasonable to change a trading rule?
Rules should change through calm review of enough evidence, not in the middle of a position.
of 4 correct.