Pre-committed rule
Why should a trading rule be written before the market shows the outcome it will be judged on?
In plain words
A pre-committed rule is a decision about positions, exits or sizing that is written down before the trade or period it governs begins. Because the outcome is unknown when the rule is set, it cannot be shaped around that outcome.
Why it matters
Judging a rule after the fact invites hindsight: the rule that looks best is simply the one that fits the move that already happened. A rule fixed in advance can be tested against many weeks of history, so its failures are visible before money is committed to it.
In a real week: ETH, week of 22 August 2022
ETH opened at 1618.13 on Monday 2022-08-22 and closed the week at 1426.76, a return of -11.83%, finishing in the lower third of the week range. A rule written beforehand — exit if the weekly return falls below -16.39%, the largest weekly drop among the four prior weeks listed — would not have triggered. Set after seeing this week, a threshold near -11.83% would be indistinguishable from fitting the fall.
A common mistake
Choosing or adjusting the rule after seeing the week it will be judged on, then presenting its result as if it had been known in advance.