My goal in this three part series of articles is to help you take your trading resolutions and make them stick for the new trading year. This article focuses on trading process.
Developing your trading process is something that will benefit traders, no matter what your expertise level. This is especially useful if you are in a slump. We commonly hear traders refer to “trading process”. But what is trading process?
I would say no matter what you trade, across all the different trading styles and time horizons, there are four essential phases to a trading process:
1) Preparing – Identify and exploiting opportunity in markets, including your own observations about the market, research, trade structuring, portfolio construction, and trade planning.
2) Performing – What you do to initiate and manage positions in the market, including sizing, risk management, entry and exit, and adjusting to the ongoing stream of news and price action.
3) Learning – Learning from successes and mistakes and reexamining ideas about trading and the markets. This includes seeing your own patterns as mentioned in Part 1 of this series.
4) Adapting – Translating your reviews into concrete goals and actions that can improve your performance.
Preparing and performing require in depth focus in markets. Most traders spend the majority of their time in these steps. Reviewing and revamping require a step away from markets to reflect on execution. Joined together, the process leads to growth and development and ongoing adaptation to the ever changing markets.
The most common shortcoming I see among traders is not that they lose their discipline or get overly emotional about their trading. Usually they do little to nothing in steps 3 and 4 above. As a result, in depth reviews in step 3 are rarely conducted. Usually there is nothing systematic, like using metrics and stats to objectively evaluate their performance. More rare is actually translating the learning into experiments and actions that aim at self-improvement. Trading is fundamentally about adaptive learning. Without it, chances of failure in this profession are very high.
The most difficult step in the process above is going from Learning to Adapting. The translation of learning into adapting is actually difficult to do as it requires several steps to achieve mastery of a new skill. Here is an example that may help you understand Adapting above.
So let’s say you learned in Learning phase from your stats that after 2 or 3 successful trades, the next one is always a loser and you have too much size on which erases all of your gains from previous trades. So simple steps in the Adapting phase could be as follows:
— Focus – Focus on the specific situation as it occurs when trading and plan what you will do it differently. So the plan might be to stop trading after 2-3 wins, observe what is happening with yourself and then paper trade the next two trades.
— Structured Rehearsal – Change begins by rehearsing skills away from problem situations and then gradually introducing the new skill in a real time environment. Taking away the stress, changing the context, usually create a new awareness. In this example, after 2-3 winning trades in a row, the trader notices that they are excited and perhaps feeling greedy which causes then to jump into the next trade without the proper discipline. So by pausing the real time situation, the trader then is forced to paper trade. After 3-5 applications of this structured learning process, the trader begins to see what was missing and may become aware of emotions, discipline and other aspects that were not present. Using structure rehearsal is a safe way to learn without damaging your P&L. A simple analogy – have you ever played golf? How long did it take you to change your swing to become more proficient to where you could execute without thinking? Quite a few rehearsals on the practice range before your could execute in a tournament? Trading is at least as hard as golf. Allow yourself the time to practice your trading swing in a “structure rehearsal” before jumping back into the fire will support you to ingrain new skills and move away from bad habits..
— Re-introduction – After the structure rehearsal process has revealed some new awareness, the trader must introduce the new awareness and skill into a real time situation. Only after consistent application can a trader feel confident that they have ingrained the new skill. What follows consistent application is a re-evaluation of your trading and going back into phase 3 – Learning.
The idea is to learn and move to a level of mastery in your trading. Taking an issue which may be related to emotion, or perhaps discipline and having control over it. Having control gives traders the edge to perform in conditions of uncertainty. This simple four step process outlined in this article is intended to turn around your trading and support adaptive learning. A process that never stops as trading is about constant change and adaption of ourselves to the ever changing markets.