HOW TO STICK TO THE PLAN?
Coming up with trading strategies is easy. Figuring out how profitable they will be in the future is a bit harder. Sticking to your trading strategy, once adopted, is a whole different ball game – a problem I imagine any trader or investor is all too familiar with.
When their trading strategies are not delivering expected performance, traders tend to break their rules. Most traders do it because they think they are suddenly more clever than the trading system or indeed, other market participants. So, they break the rules, just once, just this time...
Or not.
Traders then find other factors, foreign to their original strategy and trading plan, and persuade themselves that they have the knowledge, the proficiency and the trading wisdom to master those plans too. Soon enough that original trading strategy has been replaced by something entirely different, a mish-mash of poorly researched ideas and conflicting trading whims.
Meddling with trading strategies or failing to stick to the plan is one of the main reasons most traders never make any money or fail to keep the money they happen to make. To prevent us from interfering with our strategy or deviate from it, we require a strict Commitment Device.
A Commitment Device is some external mechanism that will stop us from altering our strategies on a whim – to protect us from ourselves. We don’t want to make stupid mistakes. We don’t want to meddle with that carefully worked-out strategy. If we’re confident about the strategy, we want to stay with it, not impulsively alter it during a natural and statistically validated drawdown period.
The idea of commitment against likely mistakes of our future selves is as old as mankind. One of the earliest appearances is found in the ancient Greek poem Sirens and the Odysseus. It follows the adventures of Odysseus returning home to Ithaca. As the story goes, Odysseus and his crew passed an area with Sirens – dangerous creatures whose enchanting music and irresistible, mesmerising singing lured sailors into treacherous waters where their ships would be crushed into pieces.
Odysseus desperately wanted to hear the Siren song but realised that once he heard it, he wouldn’t be able to resist it and stay clear of the rocks. Instead, he tied himself to the ship’s mast and ordered his crew to stuff their ears with beeswax. On no account were they to release him or change course.
Sure enough, upon hearing the Sirens singing Odysseus demanded that his crew release him and turn the vessel toward the Sirens. As they couldn’t hear him, they dutifully ignored his new demands and the ship steered clear of the rocks; by using a commitment device he could not break, Odysseus managed to hear the Siren song without endangering himself or his vessel.
Sticking to carefully crafted strategies is how profitable traders are made. Like Odysseus, they have very strict rules they adhere to in order to commit themselves to a strategy rather than get carried away with altering the strategy after each enviable drawdown.
DARA (Decision-Aiding-Robo-Advisor) is a modern example of a commitment device for traders. A digital trading partner that keeps you on the plan and forces you to stick with your good trading principles and strategy rules:
DARA will stop you from taking a trade without a Stop Loss
DARA will stop you from over-leveraging your account
DARA will stop you from taking a trade without a good Reward ratio
DARA will stop you from taking a trade without a positive Expectancy
DARA will stop you from taking a trade that does NOT fit your trading strategy.