Day Trading Is Like Living In The Matrix

Something I see beginning traders struggle with a lot is blindly following rules and then wondering why their trades don’t work out. It’s an honest mistake to make, after all, we are taught from an early age that rules are to be respected at all times. Formal education hammers into us the idea that to succeed in any endeavour we must follow a prescribed path, we must conform, we must stick to some predetermined plan. The trouble with that kind of thinking though, is that’s not the way the real world works.

Come walk with me. We’re taking a little stroll up the road to buy a newspaper (like back in the old days!) It’s an easy walk. There’s a main road we have to cross here. It’s pretty busy, but there’s a pedestrian crossing so we’ll be safe. I’ve pressed the button, and now there’s a green man (or a thing that says “walk” if you’re from the other side of the pond). It’s safe to cross, right? Except hang on a minute, about fifty yards down the road there’s a nutter in a BMW (it’s always BMWs) coming at us at about 100mph. He’s never going to stop at the red light in time. Do we cross? The ‘rule’ says yes. We have priority, and the car driver is in the wrong. But of course we wait safely until he has gone by, and make sure no other crazy people are about to mow us down before we step out.

Now swap the road for a stock chart. We see a perfect set up come along. It’s exactly like the model trade on our plan. Everything looks good, there are no red or yellow flags to suggest extra caution should be applied. There’s just one nagging doubt: this potential trade is to the long side, and right now the entire rest of the market is tanking. The futures are down, everything in the sector is down, the whole shebang is heading south except the one stock we are watching. Do we take the trade? The ‘rules’ say yes, but of course common sense prevails and we wait this one out.

We’re In The Matrix

That’s the thing about rules. They don’t really exist. Or they shouldn’t. We should think of them as guidelines, not hard and fast regulations that we must always obey. Real life is like the Matrix. Some rules can be bent, others can be broken. Should we never run a red light? What if we have a seriously sick relative in the vehicle and getting to the emergency room a few seconds later could mean the difference between life and death? Is murder always wrong? Apparently not if it’s sanctioned by the state and carried out by its salaried employees (we call them the military). Okay, I’m getting extreme with these examples, but you get the idea. 

Rules are usually meant to keep everyone safe and respectful. Trading rules are meant to keep us from losing money. But common sense should always prevail. If we miss an excellent entry by a few cents, should we write off the trade? Nine times out of ten I’d say yes, and that’s what my ‘rules’ in my personal trading plan say. But the correct answer is ‘it depends’. If I’m expecting the move to be significant and the probability of success is particularly high, then losing a few cents is neither here nor there, of course I’ll still take the trade.

All of this is not to say that we should completely forget about rules. We still need guidelines, especially when starting out. They provide a safe path for us to walk. It’s usually preferable to take the pedestrian crossing, it will increase our chances of getting across the road alive. But we should always be mindful of common sense, of that little voice in the back of our head that says, “Maybe leave this one, it doesn’t feel right.” Learning when it’s right to bend the rules is a key skill not just in trading, but in life.