The Trader's Constitution

The decisions you make at 7 AM on Sunday, in calm water, are better than the ones you will make at 11:47 AM on Wednesday, after a stop-out, with the market moving against you. Most retail traders never write down the Sunday-morning decisions. This chapter is where you do.

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A trader I'll call Jonas has, on his computer, a beautifully formatted PDF document called "My Trading Plan." It runs to 14 pages. It includes his market hypothesis, his preferred setups (annotated with chart examples), his risk parameters, his sizing rules, his daily routine, his weekly review process, and a section called "Psychology" that quotes Mark Douglas, Jesse Livermore, and three different episodes of a popular trading podcast. He wrote it eighteen months ago, after reading three trading books in quick succession, and he was very proud of it.

He has not opened the document in eleven months.

His current trading bears almost no resemblance to the document. He sizes by feel rather than by the written formula. He takes setups that are not on his list because they "look interesting." He trades through his designated breaks. He has, in the last six months, blown through his maximum daily loss limit four times, his maximum weekly loss limit twice, and his "no trading after 2 PM" rule on roughly thirty separate occasions. Each violation, in the moment, felt like a reasonable exception. A series of reasonable exceptions has produced a trading practice that no longer matches any written plan he has ever made.

When I asked him about this, he said something that I want you to keep in mind for the rest of this chapter. He said: "I know all the rules. I just don't follow them."