Adrian Reid explains how to turn emotional reactions into testable trading rules. When you feel an impulse to change your strategy, write it down as an explicit rule, backtest it against your current system, and compare the results. Repeat this process to build confidence in what actually works.
We are having an emotional reaction. An emotional reaction converted to a rule which we put into our system when.
We back test it comes from an emotion.
It doesn't come from logic, it doesn't come from sound financial thinking, it doesn't come from trading experience. It's purely emotional. And so the vast majority of the.
Time, the very vast majority of the time that is going to be a value destroying idea.
But the trouble is it came out of our mind, it came out of our emotions.
It's very hard to avoid it, bypass it, unless we test it.
So by taking that emotion, converting it to a rule, back testing our system with that new rule, comparing it to the system without that new rule, we can see objectively, oh, if I followed my emotion, that would have destroyed value. Therefore I can ignore that emotion safely in the future. Is this making sense?
And if you do that over and over again, every time you have a bit of a concern about your strategy, what do you think happens? Your level of confidence skyrockets because you know all of this emotional noise, all of this chatter is going on in the back of your mind is just chatter and it's not value creating so.
You can start to ignore it. And when I, I first launched my new, my, my first system, I, I kind of just did this because I was nervous.
I was uncomfortable with following the rules of my strategy. I kept having these ideas about how to make it better because to avoid all of these situations. And I kept testing these ideas and realizing that those ideas were dumb ideas and they didn't work. And I just test more and more and the more I tested these ideas, these emotional reactions, the more confidence I had in my existing rules. And then eventually I stopped having concerns about the rules and I just followed them.
And now it's just update the data, run the backtest, place the trade, update the data, run the back test, place.
The trade, and there's nothing, it just happens and it's fine and it's normal because all of that emotion is gone.
Because I've tested all of them and released it. So let me ask you this. How would you feel if all of your niggling concerns about your rules were gone and all that was left was confidence that those rules will work in the long run? Would that feel good?
