This post will introduce you to the Psychology Index (PI) - a proprietary tool to measure your adherence to a set of non negotiable trading rules that helps you to acquire a trading mindset. It is fundamental to your survival in the market and your successful career as a trader. It is no less than the soul of your trading, without which even the most technically astute traders with the best of systems will not be able to make it.
The Index is a tool (see table below) that you can use to help form the most desirable trading habits. It throws up an objective score that can be used to monitor your trading life and chart your progress as you work to build discipline and character on a daily basis.
Needless to say, your honesty and truthfulness in scoring against each rule is crucial to make this exercise fruitful.
Serial No. | Rule | Max Score | Partial Score | Date - X | X+1 | X+2 | X+3 | X+4 |
1 | Trade only on the basis of a completed candle, never before the candle is complete. | 1 | 0.5 | 1 | 1 | 1 | 1 | 1 |
2 | Do not chase the price if it runs away without giving you a chance to enter. Always place limit order at entry price. | 1 | 0.5 | 1 | 1 | 1 | 1 | 1 |
3 | Never take a trade without proper planning including the trade selection drill. If you could not get time to plan, DO NOT TRADE! | 2 | 1 | 1 | 2 | 1 | 2 | 2 |
4 | While planning, always apply the 3 cardinal rules of Money and Risk Management Rules: 1) Max Loss for each commodity <2% of Trading Capital (TC) 2) Total Max Loss for all commodities <3% of TC 3) Total Max Exposure for all commodities <50% of TC | 2 | 1 | 1 | 1 | 1 | 1 | 2 |
5 | Never have more than 3 open trades at any one time. Ideally 2 (or less), spread over Metals and Energy. | 1 | 0.5 | 1 | 1 | 1 | 1 | 1 |
6 | Place SL and Target for all lots on the system, not in your mind. Never move your SL. It will bring ruin. | 1 | 0.5 | 0 | 1 | 0.5 | 1 | 1 |
7 | Never average when the trade goes against you. Let the trade hit SL and take you out. | 1 | 0.5 | 0 | 0 | 0.5 | 1 | 1 |
8 | Avoid looking at the screen frequently after putting on a trade as it might force you to take wrong decisions. Come back to the screen only when you have to check and take action as per the System. | 1 | 0.5 | 0 | 0 | 0.5 | 0.5 | 1 |
9 | Always be humble. If you make a loss, accept and retreat. Do not put on the next trade or increase volume with the feeling of revenge or getting back the loss from the market. | 1 | 0.5 | 1 | 1 | 1 | 1 | 1 |
10 | Always respect your Trading System and Strategy. Never get complacent after having a good run and take trades outside your system or disregard risk management. | 1 | 0.5 | 0.5 | 0.5 | 0.5 | 1 | 1 |
Scoring Rules : a) If rule followed in letter and spirit and/or across all traded commodities, score = Max b) If rule followed only partially and/or across only some of the commodities, score = Partial c) If rule not followed, score = 0 | Total | 6.5 | 8.5 | 8 | 10.5 | 12 | ||
Score Ranking : a) 12 (Maximum) = Excellent b) 10 to 11 = Good c) 8 to 9 = Average d) Below 8 = Bad | Rank | Bad | Average | Average | Good | Excellent |
The ten rules as above are customized to our Trading System and Strategy and are designed to ensure adherence. For example - Trade Selection, Max Loss and Max Exposure are inbuilt into Rule 3 and 4. They have a higher weight by design because they are non negotiable. Every other rule can be broken once in a while but never these two. Adherence to these two rules will keep your trading career alive and kicking.
You should make it a habit to score yourself on these rules at the end of the trading day or the beginning of the next day for the prior day. The scoring mechanism is provided in an adjacent column. This will probably take you less than 5 minutes as how you performed would be fresh in your mind.
Once you score against all the rules with all honesty, the total score ranks your trading behaviour for the day. A consistently perfect score of 12 would be Excellent and aspirational. Any score of 10 or 11 would be Very Good and you should pat yourself on the back. A score of 8 or 9 would be an Average score that needs definite improvement. A score below 8 reflects Badly on your trading psychology and begs for serious introspection.
Even if you score badly in the beginning, you would know what your weaknesses are. That is often the first step to improvement if you are determined. So if you are not doing proper preparation or not adhering to the money management rules, then that is a serious shortcoming that you need to work on. Similarly, if you are not putting your SL on the system or not booking profits as mandated, you need to pay attention to that.
The biggest advantage of the tool is that it shows you the mirror. You need to sincerely and diligently work on your trading habits to adhere to the rules, as simple as that. You need to keep track of your daily scores . Plotting them on a graph is a great way to keep track of your progress.
As your score improves, you would start to see a marked improvement in your trading results. It actually happens!! The tool forces you to becomes disciplined and develop a certain character, indispensable for your trading success as also your life!
In the next post, we would talk about nuggets of Trading Wisdom, that have been collected over time from our experience and the teachings of other great trading minds. They are the icing on the cake and will help you build a great trading mindset.
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