Paying back borrowed money to the market
Have you ever changed a losing trade into a winning trade by ignoring your trading rules? I would guess almost every trader has done it at least once, and many do it regularly. The problem is, even if you made money on this single trade, the market will almost surely make you pay back your gains with high interest. Let me giving you an example.
Let’s assume you went long the Soybeans. Based on your research, your chart reading, or whatever you used for making your trading decisions, you entered your long trade highly motivated. But right after you were filled on your entry, the market moved against you. Because you are an experienced trader, you placed your stop loss order in the market right after your entry. Unfortunately, the market moved against you in big steps, and was now trading close to your stop. Because you were almost 100% sure this trade would work (error #1: the markets don’t care what you think) you decided to pull your stop order (error #2: never pull a stop order) to give the trade more room. The market moved even more against you, but right after trading through your initial stop level, the market turned around, moved up nicely for the rest of the day, and you were able to exit the trade with a nice profit (error #3: you got rewarded by not following your rules).
What do you think are your feelings at the end of the day? Will you feel miserable because you didn’t follow your trading plan, or will you feel good because you have turned a losing trade into a winner? We are all just human, and we would probably feel good about it, not knowing that such a good feeling based on bad trading decisions can eventually cost us a lot of money because we “program” our subconscious mind the wrong way. What do you think will happen on the long run? After a while, your subconscious mind will send out positive signals every time you break your trading rules, and every time you get rewarded the situation will get even worse.
The bad thing with all this is that breaking the rules will work in many cases, and you will be able to turn losing trades into winners fairly often. But one day the market will not turn around. It will keep on moving against you faster then ever, and because of the wrong programming in your subconscious mind you will not be able to get out of the trade in time. You will probably exit the trade when the pain of losing becomes too strong, but by then you have paid back the borrowed money to the market, probably with lots of interest.
This is why following the rules is so important for each trader, and why scoring a trade only by the profits is not the right way.