Why you break your own rules even though you know them

Why a handrail does not restrict you

When you walk a narrow mountain path with a steep drop on your right, a handrail does not do what people say it does. It does not stop you. It lets you walk faster and closer to the edge than you ever would without it. The same barrier is the reason you are allowed to drive fast on a road at all.

In trading, rules are almost always understood as giving something up. As something you impose on yourself because otherwise you cannot be trusted. And that is exactly why they do not hold. Anything that feels like self-punishment gets thrown away as soon as things get tight.

Brett N. Steenbarger, the best known author on trading psychology, describes rules in his Lesson 37 not as giving something up but as a transition:

Rules are the bridge between new behavior patterns and acquired habits.

Brett N. Steenbarger, The Daily Trading Coach, Lesson 37

His image for it fits the handrail exactly. Someone who follows a rule is deliberately choosing against what they feel like doing in the moment. That, he writes, is what keeps us driving on the proper side of the road even when we are in a rush. Rules are checks on our impulses: they keep us doing the right things even when we are not inclined to act in our own best interests.

What is in this article

• You know it, and you still do not do it
• "Be disciplined" is not a rule
• The test: three questions for every rule
• Keeping it visible, in whatever way suits you
• When a rule may be changed
• Your rule sheet

You know it, and you still do not do it

Every trader knows the line: cut your losses, let your profits run. There is hardly a rule repeated more often. And hardly one broken more often.

Terrance Odean did the arithmetic on this in 1998, across 10,000 accounts at a large discount broker over seven years.

His question was narrow, and that is what matters. It was not: who made money in the end? It was: you have two open positions, one is up, one is down. Which of the two do you close today?

The result, across seven years and all accounts: the position in profit is closed more than fifty percent more often than the one at a loss. The gain is taken. The loss stays open and keeps running.

That is word for word the opposite of the rule everybody knows.

Odean tested the obvious explanations one by one. It is not portfolio rebalancing. It is not trading costs. And outside December, when tax reasons do not apply, the effect is just as strong.

That leaves the one explanation every trader has used themselves: it will come back. So Odean checked what happened next. The winners that were sold returned on average 3.4 percentage points more over the following year than the losers that were held. Sitting it out and waiting for the recovery is on average the wrong call.

You might say: well, retail investors. But the same study exists for professionals. Peter Locke and Steven Mann analysed professional futures day traders and related their results to how long they held losses. All of them hold losses longer than gains. Without exception. But the least successful hold them longest, and the most successful hold them for the shortest time.

That is the real message, and it is a good one. The impulse does not go away. Not even after twenty years in the job. What makes the difference is not whether you have it, but how quickly you do what you planned to do anyway.

That is exactly what a rule is for.

"Be disciplined" is not a rule

This is the mistake almost every list of trading rules online makes.

Behavioural research is unusually clear here. A meta-analysis across 94 independent tests compared what actually changes behaviour and found a medium to large effect for one particular form. That form always has the same build:

If situation Y occurs, then I do X.

General intentions do not have this effect. "I want to be disciplined", "I want to be more patient", "I will not get greedy" are not intentions in this sense. They are wishes. They give your brain nothing to latch onto in the decisive moment, because they name no moment.

The test: three questions for every rule

Take your own list and check every line.

Can I verify it? In the evening, with yes or no, without debate. "I will not get greedy" cannot be verified by anyone, not even by you. "Three losing trades maximum, then I stop" can be.

Does it name a situation? Not a state you want to reach, but a moment you recognise. When I have two losses in a row. When the pressure comes into my chest. When the setup has not shown up by 11.

Was it fixed beforehand? A rule that appears mid-trade is not a rule. It is a justification.

Two levels: stance and rule

A manifesto and a rule book are two different things, and you need both.

A manifesto describes who you want to be. It sits above the individual trading day, it is deliberately broad, and it is not made to be ticked off in the evening. A rule describes what you do when something specific happens. It is narrow, concrete, and answerable with yes or no.

My own trading manifesto is the first level, and that is exactly what it is written for:

I trade the chart, not what I think or feel.
I am patient and wait for the right setup.
I only enter a trade if there is an A+++ setup.
I will not get greedy.
I will not FOMO enter a trade.
I never over-trade.
I never revenge-trade.
If I have stress while in a position, I will reduce my position size.

Those are stances. They tell me what I orient myself by when I open the platform in the morning. One line in there is already a finished rule, the last one. It names a situation I can recognise and an action I can carry out.

The actual work is building the second level out of the first. "I never over-trade" becomes "five trades a day maximum, the sixth is not executed". "I will not FOMO enter" becomes "if a move is already running without me, I do not get in". And the A+++ setup only becomes a rule once it is written down somewhere what A+++ specifically means for me.

That is the step almost nobody takes. Most people have the stance. The translation is missing.

An example from practice

I worked with a trader who found it hard to stay fully focused in front of the charts for longer stretches. Together we found that it always started the same way: a feeling of pressure on his chest, then his breathing tightened. After that, emotion took over.

The remarkable part was that he felt it. He even knew it. And he carried on exactly as before. That is not a lack of discipline. What he was missing was the next step. He had a warning signal but no mechanism attached to it.

I asked him two things. How often do you take a break? Answer: after two hours, when he was spent. And: what do you do in your private life when you are under stress? That answer came immediately, without thinking. He had an activity outside of work that reliably brought him down, something completely different from screen work.

Out of that we built two rules. First: a break every 45 minutes, the session rebuilt as three times 45 minutes. On balance he ended up with more trading time than before, and it was clearer. Second: when the pressure comes into the chest, then five minutes of the other thing. Not "then I calm down", but a concrete action attached to a concrete signal.

(The case has been altered. The pattern and the approach are real, the personal details are not.)

Keeping it visible, in whatever way suits you

A rule in your head is a memory, and memories lose against the market, because the market is louder. It has to go where you are already looking.

Many trading platforms can do this already. You can store your rules directly in the chart view, top left, alongside stop loss, drawdown and whatever else counts for you, and add your own lines. Whether that works and how depends on your setup. If your platform cannot do it, a sticky note on the frame does the job just as well.

How you tune yourself in is something you have to try out. I see every variant:

• a note on the screen
• reading the rules out loud in the morning
• one rule of the day that is particularly relevant right now
• and the people who simply know them, because it has been in there long enough

There is no right answer here. There is only what holds for you.

And an honest note on that: if you leave it for three weeks, nothing happens. Nobody comes by to check. It is your money, your account, your issue. Which is also why no rule works that you did not give yourself.

When a rule may be changed

This is where the handrail image stops fitting. A handrail is rigid. A market is not.

Whether a rule needs changing is not something you find out mid-trade, but afterwards. In the review of the day, with three questions: what was good? What was bad? And what needs my attention?

The third question is the decisive one. If the same thing shows up there week after week, it is no longer a discipline problem. Then something about the rule is wrong and it needs looking at.

What matters is when this happens. Never while trading. Changes to the rule book are written with distance, after the reflection, outside the process. And before you go into the next session, you read the new version once more and check it.

Anything that happens in the middle of a position is not changing. It is breaking, with a better justification.

Where the review sits in the shape of a trading day, and why almost everyone skips it, is in Trading psychology: the four phases of your trading day.

Your rule sheet

Take an intention you have set yourself many times and translate it.

What I intend:

The situation where I notice it:

What I concretely do then:

The situation traders need a rule like this for most urgently is the moment right after a loss. What happens in your head there, and how to notice it early, is in Revenge trading: catching the moment emotion takes over.

In the evening you do not check "was I disciplined", you check every rule separately with yes or no. And on every no, the one question that takes you further: what happened immediately before?

And if that sounds like a lot of effort for a few sentences: without those sentences you do, in the decisive moment, exactly what Odean measured across 10,000 accounts. It is word for word the opposite of "cut your losses, let your profits run".

How I work with this

In coaching we do not assemble your rules from a list, we build them out of your own losses. We look at where it tips for you, which signal comes before it, and what you can realistically do in that moment. Out of that comes a sentence you can check in the evening.

The first step is a short, non-binding intro call.

About the author

Angelika Behling is a performance coach for traders. More than eleven years of coaching experience and over 410 traders and teams supported. She trades her own capital. Contact and booking at coachfortraders.com.

Sources

• Odean, T. (1998). Are Investors Reluctant to Realize Their Losses? The Journal of Finance, 53(5), 1775–1798. (10,000 accounts at a large discount broker, 1987 to 1993; ratio of selling probabilities around 1.5)
• Locke, P. R. & Mann, S. C. (2005). Professional trader discipline and trade disposition. Journal of Financial Economics, 76(2), 401–444.
• Gollwitzer, P. M. & Sheeran, P. (2006). Implementation Intentions and Goal Achievement: A Meta-Analysis of Effects and Processes. Advances in Experimental Social Psychology, 38, 69–119. (94 independent tests, effect size d = 0.65)
• Steenbarger, B. N. (2009). The Daily Trading Coach, Lesson 37: Build Your Consistency by Becoming Rule-Governed.