As a pitcher in college in the late 60?s (I?m dating myself here) I became very familiar with of the Rules of Baseball, of which there are many. There are basically two types of rules. Rules of the game, which pertain to the contest itself and are always the same, and ground rules which could vary depending upon where and what time the game was actually played.? Some examples of the rules of the game of baseball are as follows:? A game shall consist of nine innings, three outs per team, per inning. ??Bases shall be 90 feet apart. The pitcher?s mound shall be 60 feet 6 inches from home plate. Three strikes and the batter is out, four balls and the batter is awarded first base, etc. ??The rules of the game were intended to be fair and can benefit both the offense and defense. If you don?t like the rules, go play another game.
Ground rules deal with the infinite number of venues and parks baseball can be played in. Ground rules can vary depending on the location of the field and shape of the stadium itself. ?Following are three examples. ?How are batted balls dealt with when interfered with by a fan?? ?What is awarded when it is determined that a ball in play was inadvertently affected by the configuration of the park itself?? Is there a curfew determining how late an inning can be started? ?No locale is the same and the local ground rules could have a decided advantage for the home team, which would be very familiar with them.
In trading we have rules of the game, as well.? And like baseball, if you cannot accept them, you cannot play the game.?? And make no mistake, trading is a game! ?In my classes, I liken it to a video game. ?Price ponging between supply and demand areas until there is a break through.? Young people get this very well for they have no belief systems that interfere with the decision making process. ?They just go by what they see; only believing what they view on a price chart. ?They learn easily where the twists and turns in price may be, because it is based on the evidence in front of them in the form of red and green pictures. ?Their young brains are not clouded by logic. ?And like ?there is no crying in baseball?; there is no logic in intraday trading. ?Come to think of it, there is no crying in trading either!
So what are some of the rules of trading, and how do they equate with baseball anyway? ?Let?s examine a few.
Rule # 1?? We will lose on a certain percentage of trades no matter what methodology we choose.? Look at this as the number of times a batter will fail to get a hit. Even though he or she is doing everything right, they will fail a certain measurable percent of time they swing the bat.
Rule# 2? ??We will get stopped out some trades only to have them reverse in the direction of our original expectation. This is like a batter having two strikes on him, taking a pitch that is at eye level and getting called out on strikes. ?It will happen. You can choose to stop playing the game right then and there (that?s not fair!) or you can go back to the bench and await your next turn at bat (trade).
Rule # 3??? We must accept that on every entry we make, we are not in control. Since anything can happen after we expose ourselves to risk, we must control our losses and place a stop.? Even though a manager may have his best pitcher in the game, he must have another at the ready in order to limit the damage another team may cause.
Rule# 4??? We must determine what we will risk on every single trade that we make. This should be the same amount every time. ?A manager must also have in mind the number of runs he will allow any one of his pitchers to give up at any time.
Rule # 5? ??We will never make the perfect entry or perfect exit. Give it up. ?It can happen but it is unlikely.? A pitcher never goes into a game thinking he will throw a perfect game or no-hitter. ?A batter doesn?t go into a game expecting to go five for five. ?Players are only looking for consistency in their performance.
Rule # 6? ??We cannot regret the outcome of any of our actions if made within the framework of our trading plan.? There can be hindsight on every single trade we make which comes under the category of would have, could have, should have. ?If you multiply 200 X 38, you will arrive at the number of days in my trading life that I could have second guessed myself. ?If we follow our plan to the best of our ability, we can have no remorse. We must move on. ?After all, there is no crying in trading.
So what are the ground rules in trading? This is where you get the advantage of the home team. ?Know your instruments and their personalities. ?No trade is the same. Every stock trades a little bit differently. ??Each Future has a different profile. ?Certain methods work better on some things as opposed to others.? Breakouts don?t usually pay off in a big way in Stocks or Stock Indices, but in Wheat, Soybeans, Gold or Oil, they can pay big dividends.? Get to know the ground rules of your ?friends? well, and they will reward you handsomely.