Trading Rules: A Rule Needs a Number
Trading rules are the individual instructions inside a trading plan, and a rule only counts as one if two people reading it would take the same action. That requires numbers rather than descriptions, because a rule without a threshold cannot be checked or broken.
How it works
A rule is an instruction that produces the same action regardless of who reads it. That is a higher bar than it sounds, and most written rules fail it.
“Only trade strong trends” is not a rule. Two people reading it disagree about what counts, and one of them is you on a different day. “Only take long trades when the 50-period average has been rising for at least ten bars” is a rule, because it has a number and it produces one answer.
The number is what makes it checkable. Without one, you cannot look back at fifty trades and count how many followed the rule — which means the rule cannot be evaluated, improved, or shown to have been broken.
Fewer, harder, logged
A long rule set is usually an unfollowed one. Twenty conditions produce constant partial compliance, which is the same as having no rules and a great deal more paperwork. Five that are actually applied are worth more than any number that are not.
“Unless it looks especially good” is the phrase that dissolves a rule. Every discretionary exception is applied precisely when the pressure to act is highest, which is when rules exist to help.
If an exception is genuinely warranted, write it into the rule with its own number. A rule with a documented exception is still a rule; a rule with an undocumented one is a preference.
Enforcement is the log, not willpower. A broken rule that nobody wrote down did not happen as far as any later review is concerned, and the memory of it will be reconstructed around whether the trade worked.
A single column in a spreadsheet — rule followed, yes or no — turns compliance into a countable number. Sixty percent compliance is a fact you can do something about; “I mostly follow my rules” is not.
In practice
Rules changed after a loss are fitted to the most recent event. The sample restarts, the change is never tested, and the process repeats. Changing them on a fixed date, with the log in front of you, is the version that can improve.
A volume condition is the one rule type that adds an input the price rules do not already have. Most rule sets are several conditions computed from the same closes, which the confluence page treats as the standard way traders manufacture agreement.
A slower method tests its rules fewer times a year, which means it takes longer to know whether they work — a real cost of long-horizon trading that is rarely stated.
The stop rule is broken more than any other, and it is the one whose breach costs most. Which makes it the first candidate for automation: an order placed at entry does not require a decision later, and the moment the decision would have been made badly is removed entirely.
Following the rules perfectly still pays the spread and commission on every trade, which is why a rule limiting frequency is as important as any rule about entries.
What trading rules are not
They are not a strategy. They are how a strategy is written down.
They are not guidelines. A guideline you sometimes ignore is a preference.
They are not improved by adding more. Compliance falls as the count rises.
And they are not a substitute for sizing. A perfectly followed rule set at the wrong size still ends an account.
How this connects
Every rule should leave a trace in the trading journal. The yes-or-no column described above is the simplest journal field there is, and it keeps later review about behavior rather than outcomes.
Rules can only be tested once they have numbers. Backtesting runs them over history, and adjusting thresholds until that history looks good is overfitting, the same trap as refining after a loss.
The stop rule is best enforced by the order itself. A bracket order places the stop loss and the target at entry, so neither depends on a decision made mid-trade.
Size and stopping rules come from different arithmetic. Position sizing sets how much one trade can lose, and risk of ruin sets how much the whole rule set can lose before it has to be stopped.
A daily loss limit is the frequency rule’s partner. It caps the damage from one bad session the way a trade cap guards against overtrading.
Regime filters need a measurable input. A reading of the average directional index or the choppiness index is a threshold two people will agree on.
Fully numeric rules can be automated. Systematic trading is where this page’s logic ends up, and Pine Script is one common way to code a strategy so its conditions are checked without judgment.
And expectancy is what the log finally measures: whether following the rules produced a positive average trade, which a win rate on its own cannot show.
When it fails
A good rule set loses money in the wrong regime. It produces exactly the trades it was written to produce, in conditions where those trades do not work, and each one pays the round trip. That is not a failure of the rules and it looks identical to one.
The second failure is the drifting definition. A rule about “a strong close” means something slightly different each month, and the drift is invisible because nothing is written down.
A third is rules that cannot be violated. A rule set that has never been broken is either automated or too loose to constrain anything.
A fourth is optimization dressed as refinement. Adjusting a threshold from 20 to 22 after reviewing outcomes is fitting to the sample you have.
And a fifth is having rules for entries and none for size, frequency or stopping, which is the usual shape and the one that leaves the important decisions unwritten.
The original data
Of the 24,971 trading and investing videos measured for this site, 75 have “trading rules” in the title, from 68 channels, at a median of 10,068 views.
The question: The rule says exit and the trade looks fine. Exit?
That efficiency figure is the one to build a rule around. If only three bars in ten sit in conditions where price travels efficiently, then a rule set with no regime filter is trading the other seven — and the filter is a number you can compute rather than a judgment you make. Write one rule that says which conditions you will not trade in, with a threshold in it, and it will do more for a result than any refinement of the entry, because it removes trades rather than improving them.
Related
Trading plan is the document these rules live inside. Discipline is what following them is usually called, and mostly it is design. And trade review is where compliance becomes a number.
The test I use on a rule is reading it aloud to somebody who does not trade and asking what they would do today. Every time they hesitate, the rule has judgment hidden in it, and the hidden judgment is where your results are actually decided.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.