How do you deal with the overwhelming amount of investing advice and economists’ comments that pass before you ? This is one of the biggest challenges that traders/investors face in our internet world of instant access.
Too much information can create confusion and have the effect of paralysis of analysis. That’s where rules-based trading shows its muscle. Rules are not based on opinion or news. They are based on market and equity evidence. They protect you and guide you through any stock market environment to generate gains in favorable conditions while protecting capital and surviving difficult market conditions. This leads us to two broad categories of rules: some which protect from excessive losses and others that lock in profit.
Every rules-based investor must find a set of rules that matches their method and risk tolerance, but they don’t have to create this set from scratch. There are notable trail blazers in every proven market method. If we study their habits and patterns, test drive their successful rules, adopt those rules that serve us well while identifying ways to apply those that are harder to follow, we will emerge with our personal set of guidelines for rules-based trading that fits our character. The key is NOT to adopt someone else’s rules willy-nilly, but custom fit a sound set of rules to your personality. Know that these rules will only be as valuable as your discipline in following them. If a canned set of rules include one or two that you simply cannot follow, you must find a way to modify them so that you can be a full disciple. In making any change, testing for effectiveness in achieving the outcome desired is important, too.
In closing, for investors, rampant emotions are the byproduct of market ups and downs. Rules-based investing allows for better portfolio control and emotional control. The rules themselves will not help, even if they are in writing. Success follows investors who create their set of rules and then have the discipline to follow them!